Health Care by Michael F. Cannon Not Enough Healthcare to Go Around by Michael D. Tanner The Ethos of Universal Coverage by Michael F. Cannon Universal Coverage Means ‘Willing to Let You Die Sooner’ by Michael F. Cannon Rwanda and the Psychic Benefits of Universal Coverage by Michael F. Cannon The Church of Universal Coverage Becomes Self-Aware by Michael F. Cannon Still Don’t Think Universal Coverage Is a Religion? by Michael F. Cannon

SECTION TWO: THE U.S. AND THE WORLD Chapter 8 Chapter 9 Chapter 10

The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World by Michael D. Tanner WHO’s Fooling Who? The World Health Organization’s Problematic Ranking of Health Care Systems by Glen Whitman Bending the Productivity Curve: Why America Leads the World in Medical Innovation by Glen Whitman and Raymond Raad

Lessons from the Fall of RomneyCare by Michael D. Tanner Massachusetts Miracle or Massachusetts Miserable: What the Failure of the “Massachusetts Model”Tells Us about Health Care Reform by Michael D. Tanner Busting the Bay State: Hiding the Cost of Health Reform by Michael F. Cannon The Massachusetts Health Plan: Much Pain, Little Gain by Aaron Yelowitz and Michael F. Cannon Romney’s Chronic Health Care Problem by Michael D. Tanner RomneyCare: Making a Fool of Every Republican It Touches Since 2006 by Michael F. Cannon

Does Barack Obama Support Socialized Medicine? by Michael F. Cannon Health Care Reform: Questions for the President by Michael F. Cannon U.S. Healthcare: What Hath Obama Wrought? by Michael F. Cannon Bad Medicine: A Guide to the Real Costs and Consequences of the New Health Care Law by Michael D. Tanner The New Health Care Law: What a Difference a Year Makes ObamaCare—The Way of the Dodo by Michael F. Cannon How Sebelius Plans to Save Obamacare: Creating Dependence by Michael F. Cannon

It Now Falls to Congress by Roger Pilon We Won Everything but the Case by Ilya Shapiro John Roberts, Judicial Pacifist by Ilya Shapiro Health Law a Loser despite Court Victory by Michael F. Cannon Chief Justice Roberts Sold Out the Constitution for Less Than Wales by Ilya Shapiro ObamaCare’s Now a Bigger Mess by Michael D. Tanner If ObamaCare Survives, Legal Battle Has Just Begun by Jonathan H. Adler and Michael F. Cannon

SECTION SEVEN: MULTIMEDIA LINKS AUTHORS’ BIOGRAPHIES

INTRODUCTION

On March 23, 2010, President Barack Obama signed the Affordable Health Care Act into law. Renamed ObamaCare at its conception, the Act’s 2,700 pages are filled with government price controls, mandates, subsidies, bureaucracies, and regulations. And now, having escaped being struck down by the Supreme Court, the dangers it poses to individuals, families, companies, industries, and our nation as a whole, have to be confronted, halted, and replaced. The Cato Institute has been a leader in educating the American people about the threats ObamaCare poses to individual freedom, to democracy, and to health care reform. This book assembles the best of our work on ObamaCare, and on how free markets are the only way to make health care better, more affordable, and more secure. As you will note, this book contains the work of over a dozen national experts who have dedicated their professional lives to enabling true, effective, health care reforms. Readers can follow Cato’s work at www.cato.org, and the [email protected] blog, www.cato-at-liberty.org. This book explains why Congress should repeal ObamaCare, and what reforms Congress should then put in its place. But make no mistake. By this book’s conclusion, you will understand why “replace” means nothing without “repeal.” Repealing ObamaCare—and pursuing the solid, proven solutions we set forth in the following pages—is real health care reform.

Michael F.Cannon July 4, 2012

SECTION ONE: A LIBERTARIAN PERSPECTIVE ON HEALTH CARE REFORM

Chapter 1

Health Care by Michael F. Cannon

Health care represents a special area of public policy for libertarians, although not for the reasons typically offered in support of government intervention. In limited circumstances, a substantial number of libertarians support state-sponsored coercion to prevent the spread of infectious diseases. In the absence of violence, theft, tortious injury, fraud, or breach of contract, however, libertarians reject the use of coercion in health and medicine as immoral and counterproductive. People can do violence to each other by transmitting contagious diseases. Therefore, most libertarians sanction limited government efforts to identify and contain infectious diseases and punish those who infect others intentionally or negligently. They do so cautiously, however. A 2004 survey published in the journal Health Affairs hints at one way such powers could be abused. Amid widespread concern about bioterrorism, roughly equal shares of white and black Americans expressed support for quarantines to contain a serious contagious disease. When subsequently asked whether they would support a compulsory quarantine, where the authorities would have the power to arrest violators, 25% of whites changed their minds, whereas 51% of blacks did, indicating an awareness that these policies would not necessarily be fairly implemented. Just as libertarians advocate limits on government’s ability to pursue criminals generally, they closely circumscribe the use of force to protect public health. For example, an outbreak must pose a serious health threat, there must be no feasible alternative to coercion, and the state must use the least coercive measures available. Libertarians reject government intervention to remedy private health problems, such as obesity, diabetes, or addiction. There exist more unjustified uses of the state’s coercive power in health and medicine than in nearly any other area. In the United States, governments routinely forbid competent adults from making medical decisions that affect no one but themselves. Libertarians maintain that such laws are unjust and ultimately counterproductive. For example, the government denies patients, including terminally ill patients, the ability to determine their course of treatment. Proponents argue that such laws exist to ensure the safety and effectiveness of medical products. Libertarians argue that those laws cause more morbidity and mortality than they prevent. Licensing laws restrict entry into the medical professions, dictate what tasks each profession may perform, and deny patients the right to be treated by the practitioner of their choice. Libertarians agree with a quip that Mark Twain delivered before the New York General Assembly in 1901, as reported in The New York Times: I don’t know that I cared much about these osteopaths until I heard you were going to drive them out of the State; but since I heard this I haven’t been able to sleep . . . Now what I contend is that my body is my own, at least I have always so regarded it. If I do harm through my experimenting with it, it is I who suffer, not the State.

Proponents of licensing argue that it enhances the quality of care, but libertarians point to the fact that low-quality care is widespread despite licensing, that licensing does not improve overall quality because it reduces access to care for the poor, and that the chief proponents of licensing are incumbent practitioners who profit by restricting entry. Meanwhile, unregulated markets are extremely likely to develop private quality certification. Government prohibits the sale of human organs to transplant patients or organ brokers. Proponents of that ban consider it immoral to commodify the human body, but such a ban allows government to assert a property right in the body of every citizen. Further, it makes organs no less valuable a commodity, but merely imposes on them a zero price and consequently creates an artificial shortage that causes thousands of unnecessary deaths in the United States each year. Governments infringe on the individual’s ability to choose whether to purchase health insurance and what type of insurance to purchase. Targeted tax breaks penalize consumers for purchasing the wrong type of health insurance or no insurance. Libertarians note that these laws require adults to buy coverage they do not want and may even consider immoral. Legislatures enact these laws at the behest of the providers of the covered services, which increases the costs of health insurance and the number of uninsured. Libertarians further object to the government’s refusal to honor contracts limiting a provider’s liability for malpractice in exchange for reduced-price or free medical care. Proponents of that rule argue that patients harmed by negligent providers might not be able to recover. Opponents say that such rules limit the right of consenting adults to engage in mutually beneficial exchanges that harm no one else and that they reduce access to care among those least able to pay. Finally, regulations of this sort reduce experimentation with malpractice rules that ensure both quality and access. Government may do the greatest damage to health and personal liberty through its influence over the financing of medical care. Government programs such as Medicare and Medicaid finance nearly half of all medical expenditures in the United States. They devour private health insurance markets and deny adults the ability to choose whether and how to fund their health needs in retirement and how to assist the needy. These programs waste more than $60 billion per year on care that makes patients no healthier or happier. Targeted tax breaks divert even private spending from pursuing high-quality, affordable care and unnecessarily induce millions to become dependent on government. These targeted tax breaks deny workers control over their earnings and their health insurance. They encourage wasteful consumption of medical care and strip workers of their health insurance when they leave a job. In 1963, Nobel laureate economist Kenneth Arrow wrote that licensure and other features of health care markets can be partially explained by uncertainty about the quality of medical care and the fact that physicians possess more certainty regarding quality than do patients. Many supporters of licensure cite Arrow’s analysis when arguing for government intervention to correct the perceived market failures of imperfect and asymmetric information. With respect to Arrow’s conclusions, however, health economist James C. Robinson has replied, The most pernicious doctrine in health services research, the greatest impediment to clear thought and successful action, is that health care is indifferent . . . To some within the health care community, the uniqueness doctrine is self-evident and needs no justification. After all, health care is essential to heath. That food and shelter are even more vital and seem to be produced without professional licensure, nonprofit organization, compulsory insurance, class action lawsuits, and 133,000 pages of regulatory prescription in the Federal Register does not

Some say Americans use too much healthcare, that even if reform is achieved, universal access should not mean unlimited access. Tough choices must be made. Others worry that the most needy or least able to fight for themselves will be left waiting. Should healthcare be rationed? No one can fail to be moved by heartbreaking stories of people suffering and unable to get healthcare they want or need. But compassion is a sentiment, not a policy. We tend to talk about healthcare in the philosophically abstract. “Is healthcare a right or a privilege?” goes the refrain. In reality, it is neither. Healthcare is a commodity—and a finite one at that. There are only so many doctors, hospitals, and, most important, money to go around. After all, every dollar spent on healthcare is one not spent on education, infrastructure, or defense. President Obama is right about the unsustainable trajectory of healthcare spending. We spend $2.5 trillion per year for healthcare, 17.5 percent of the gross domestic product. Under current trends, that will increase to 48 percent of GDP by 2050. At that point, government healthcare programs like Medicare and Medicaid alone will consume 20 percent of GDP. Quite simply, we cannot provide all the healthcare everyone might want. Sure, there are efficiency savings to be had here and there. But savings from things like greater emphasis on preventive care, better evidence as to best practices, and electronic medical records are unlikely to be realized for years, if at all. Any healthcare reform will have to confront the biggest single reason costs keep rising: The American people keep buying more and more healthcare. At its most basic, no one wants to die. If a treatment can save our lives or increase quality of life, we want it. Therefore, in the long run, the only way to spend less on healthcare is to consume less healthcare. Someone, sometime, has to say no. Take just one example. If everyone were to receive a CT brain scan every year as part of an annual physical, we would undoubtedly discover a small number of brain cancers earlier than we otherwise would, perhaps early enough to save a few lives. But given the scan’s cost, adding it to all annual physicals would quickly bankrupt the nation. False hope. The real debate, therefore, is not about whether we should ration care but about who should ration it. Currently, that decision is often made by insurance companies or other third-party payers. Obama and congressional Democrats want to shift that decision-making power to the federal government. Some, frustrated by the insurance-based rationing of the current system, naively believe that putting the

government in charge would mean unlimited access to the care they need and desire. When Michael Moore, in Sicko, showcased emotional tales of people denied experimental treatment by insurance companies, he implied that a government-run system would certainly pay for it. The reality, however, is that every government-run healthcare system around the world rations care. In Great Britain, the National Institute on Clinical Effectiveness makes such decisions, including a controversial determination that certain cancer drugs are “too expensive.” The government effectively puts a price tag on each citizen’s life—some $44,305 per year, to be exact. That’s just a baseline, of course, and, as the British institute’s chairman, Michael Rawlins, points out, the agency has at times approved treatments costing as much as $70,887 per year of extended life. But these are approved only if it can be shown they extend life by at least three months and are used for illnesses that affect fewer than 7,000 new patients per year. Free-market healthcare reformers, on the other hand, want to shift more of the decisions (and therefore the financial responsibility) back to the individual. People should have the absolute right to spend their own money on whatever they want, including buying as much healthcare as they want. And, if they are spending their own money, they will make their own rationing decisions based on price and value. That CT scan that looked so desirable when someone else was paying may not be so desirable if you have to pay for it yourself. The consumer himself becomes the one who says no. Of course, as a compassionate society, we may choose to help others pay for some care. That’s a worthwhile debate to have. But our resources are not unlimited. Choices will have to be made. And, therefore, the real question should be: Who will make those choices? The only way to spend less on healthcare is to consume less healthcare. This article appeared in the August 2009 issue of U.S. News & World Report.

Many [email protected] readers will get it immediately. They can stop reading now. For everyone else, this image perfectly illustrates the ethos of what I call the Church of Universal Coverage. Like everyone who supports a government guarantee of access to medical care, the genius who left this graffiti on Kaiser Permanente’s offices probably thought he was signaling how important other human beings are to him. He wants them to get health care after all. He was willing to expend resources to transmit that signal: a few dollars for a can of spray paint (assuming he didn’t steal it) plus his time. He

probably even felt good about himself afterward. Unfortunately, the money and time this genius spent vandalizing other people’s property are resources that could have gone toward, say, buying him health insurance. Or providing a flu shot to a senior citizen. This genius has also forced Kaiser Permanente to divert resources away from healing the sick. Kaiser now has to spend money on a pressure washer and whatever else one uses to remove graffiti from those surfaces (e.g., water, labor). The broader Church of Universal Coverage spends resources campaigning for a government guarantee of access to medical care. Those resources likewise could have been used to purchase medical care for, say, the poor. The Church’s efforts impel opponents of such a guarantee to spend resources fighting it. For the most part, though, they encourage interest groups to expend resources to bend that guarantee toward their own selfish ends. The taxes required to effectuate that (warped) guarantee reduce economic productivity both among those whose taxes enable, and those who receive, the resulting government transfers. In the end, that very government guarantee ends up leaving people with less purchasing power and undermining the market’s ability to discover cost-saving innovations that bring better health care within the reach of the needy. That’s to say nothing of the rights that the Church of Universal Coverage tramples along the way: yours, mine, Kaiser Permanente’s, the Catholic Church’s . . . I see no moral distinction between the Church of Universal Coverage and this genius. Both spend time and money to undermine other people’s rights as well as their own stated goal of “health care for everybody.” Of course, it is always possible that, as with their foot soldier in Oakland, the Church’s efforts are as much about making a statement and feeling better about themselves as anything else. This article appeared on February 7, 2012 on [email protected]

I cannot disagree with Uwe Reinhardt’s response to my previous post at National Journal’s Health Care Experts blog. But his response bears clarification and emphasis. Improving “population health” generally means “helping people live longer.” To paraphrase, Reinhardt then writes: If helping people live longer were our objective in health reform, we could do better than universal coverage. But health reform is not (solely or primarily) about helping people live longer. It is (also or primarily) about other things, like relieving the anxiety of the uninsured. I applaud Reinhardt for acknowledging a reality that most advocates of universal coverage avoid: that universal coverage is not solely or primarily about improving health. Will Reinhardt go further and acknowledge that, since universal coverage is largely about some other X-factor(s), that necessarily means that advocates of universal coverage are willing to let some people die sooner in order to serve that X-factor? This article appeared on October 21, 2009 on [email protected]

Chapter 5

Rwanda and the Psychic Benefits of Universal Coverage by Michael F. Cannon

Last week, the New York Times published an article subtitled, “In Desperately Poor Rwanda, Most Have Health Insurance.” The main theme was the contrast between Rwanda’s compulsory health insurance system and the as-yet-non-compulsory U.S. health insurance market: Rwanda has had national health insurance for 11 years now; 92 percent of the nation is covered, and the premiums are $2 a year. Sunny Ntayomba, an editorial writer for The New Times, a newspaper based in the capital, Kigali, is aware of the paradox: his nation, one of the world’s poorest, insures more of its citizens than the world’s richest does. He met an American college student passing through last year, and found it “absurd, ridiculous, that I have health insurance and she didn’t,” he said, adding: “And if she got sick, her parents might go bankrupt. The saddest thing was the way she shrugged her shoulders and just hoped not to fall sick.” I don’t see anything absurd here, but I do see something remarkable. Rwanda is so poor, its per capita income is about 1 percent that of the United States ($370 vs. $39,000). Its health care sector is an international charity case: “total health expenditures in Rwanda come to about $307 million a year, and about 53 percent of that comes from foreign donors, the largest of which is the United States.” That’s roughly $32 per person per year, which doesn’t buy much. Dialysis is “generally unavailable.” As are many treatments for cancer, strokes, and heart attacks, making those ailments “death sentences” more often than in advanced nations. Life expectancy at birth is 58 years, compared to 78 years in the United States. Rwandan children are 15 times more likely to die before their first birthday (7 vs. 107 deaths per 1,000 live births) and 25 times more likely to die before turning five (8 vs. 196 deaths per 1,000 live births) than U.S.-born children. (If you want to meet some Rwandan kids struggling to make it to age 5, read my friend’s blog, Life of a Thousand Hills.) And yet, the saddest thing is a healthy-but-uninsured American college student. What the Times sees as a paradox isn’t really a paradox. Yes, the poorer nation has a higher levels of health insurance coverage. But the wealthier nation does a better job of providing medical care to everyone, insured and uninsured alike. The Times reports that Rwanda’s national health insurance system isn’t fancy, “But it covers the basics,” including “the most common causes of death—diarrhea, pneumonia, malaria, malnutrition, infected cuts.” Surely, the Times must know that anyone walking into any U.S. emergency room with any of those conditions would be treated, regardless of insurance status or ability to pay. The same is true of other acute conditions, like heart attacks and strokes, for which uninsured Americans receive better treatment than insured Rwandans. True, some uninsured Americans end up filing for bankruptcy, but let’s be clear: while bankruptcy is no day at the beach, suffering

bankruptcy because you got the treatment is better than suffering death because you didn’t. (As for dialysis, the United States already has universal coverage for end-stage renal disease through the Medicare program.) The Healthcare Economist puts it this way: “Would you rather be sick in the United States without insurance or sick with insurance in Rwanda?” You get the point. If there’s a paradox here, it’s that insurance status does not necessarily correlate with access to medical care: uninsured people in the wealthy nation actually have better access to care than insured people in the poor nation. An even bigger paradox, though, is Rwandan attitudes toward the United States. The United States generates many of the HIV treatments currently fighting Rwanda’s AIDS epidemic, as well as other medical innovations saving lives there and around the world. More than any other nation, we create the wealth that purchases those and other treatments for Rwandans and other impoverished peoples. The United States is probably closer to providing universal access to medical care for its citizens—and, indeed, the whole world—than Rwanda. Rwanda’s “universal” system leaves 8 percent of its population uninsured. Though official estimates put the U.S. uninsured rate at 15.4 percent, the actual percentage is lower; and again, uninsured Americans typically have better access to care than insured Rwandans. The real paradox is here that Rwandan elites think the United States is doing something wrong. Why? Here’s one answer: Rwanda’s government explicitly guarantees health insurance to its citizens, and for some people that guarantee has value apart from any health improvements or financial security that may result. Dr. Agnes Binagwaho, “permanent secretary of Rwanda’s Ministry of Health,” illustrates: Still, Dr. Binagwaho said, Rwanda can offer the United States one lesson about health insurance: “Solidarity—you cannot feel happy as a society if you don’t organize yourself so that people won’t die of poverty.” Set aside that a (permanent) third-world bureaucrat is telling the United States how to keep people from dying of poverty. Binagwaho cannot feel happy without that government-issued guarantee. How might such a guarantee increase happiness? It could make people happier by reassuring them that they themselves will be healthier and more financially secure (self-interest), or that others will be (altruism). Yet altruism and self-interest probably cannot explain the “happiness benefits” that people enjoy when governments guarantee health insurance. As I have argued elsewhere, the jury is out on whether broad health insurance expansions like ObamaCare result in better overall health; they may, but it is entirely possible that they would not. The jury is also out on whether ObamaCare will produce a net increase in financial security. It will subsidize millions of low-income Americans, but it will also saddle them with high implicit taxes that could trap millions of them in poverty. Meanwhile, ObamaCare’s new taxes will reduce economic growth and destroy jobs. If such a guarantee doesn’t improve health or financial security, it’s not worth much in terms of altruism or self-interest. But there’s another potential “happiness benefit” that might accrue to supporters of a government guarantee of health insurance: it could make them happier by allowing them to signal something about themselves—e.g., that they are compassionate. If people use a government guarantee of health insurance in this way, that could explain why Rwandan elites feel bad for uninsured Americans. They may feel empathy for uninsured Americans because they perceive the American electorate has not sent uninsured Americans a valuable signal (“We care about you!”). Meanwhile, the act of expressing pity for uninsured Americans allows Rwandan elites to signal something about themselves (“We are compassionate!”). Robin Hanson has a lot to say about why people might use health insurance and medical care to signal loyalty and compassion.

My hunch is that this is an under-appreciated reason why some people support universal coverage: a government guarantee of health insurance coverage provides its supporters psychic benefits—even if it does not improve health or financial security, and maybe even if both health and financial security suffer. If that’s the case, then we’re facing the same problem that Charles Murray identified in Losing Ground, his seminal work on poverty: Most of us want to help. It makes us feel bad to think of neglected children and rat-infested slums . . . The tax checks we write buy us, for relatively little money and no effort at all, a quieted conscience. The more we pay, the more certain we can be that we have done our part, and it is essential that we feel that way regardless of what we accomplish . . . To this extent, the barrier to radical reform of social policy is not the pain it would cause the intended beneficiaries of the present system, but the pain it would cause the donors. The real contest about the direction of social policy is not between people who want to cut budgets and people who want to help. When reforms finally do occur, they will happen not because stingy people have won, but because generous people have stopped kidding themselves. One thing is for certain. When Rwandan elites pity uninsured Americans, there is something very interesting going on. While I’m at it, the health-policy advice I offered to China and India also applies to Rwanda: Does not the fact that “these countries lack the fiscal resources required for universal coverage because of their . . . low average wages” suggest that many residents have more pressing needs than health insurance? For things that might just deliver greater health improvements? In a profession where universal coverage is a religion, such questions are heresy, I know. China and India are in the process of a slow climb out of poverty. It is entirely possible that the best thing those governments could do to improve [health care] markets and population health would be to enforce contracts, punish torts, contain contagion, and nothing else. Of course, if Rwandan elites support universal coverage largely because they want to signal something about themselves, this advice may fall on deaf ears. This article appeared on June 21, 2010 on [email protected]

Chapter 6

The Church of Universal Coverage Becomes Self-Aware by Michael F. Cannon

I have blogged before about the “Church of Universal Coverage,” my affectionate term for those whose support for universal health insurance coverage is impervious to reason—or would be, were they to subject it to reason. I read something today that has me wondering whether the Church might be waking up to the fact that it is indeed a religion. The July/August 2008 issue of the journal Health Affairs contains a letter from Mitch Roob, the Indiana official who oversees Gov. Mitch Daniels’ (R) health care agenda. Roob writes: Like other advocates for children’s health, I have an almost religious conviction that the State Children’s Health Insurance Program (SCHIP) is effective public policy . . . Although I have no empirical evidence to support the assertion that SCHIP is a beneficial and effective way to invest in children’s health, I worked to expand the program . . . I was not able to base this expansion on empirical evidence because there is none . . . The lack of actual evidence of the benefits for children is simply damning to the program . . . Public policymakers need more than just a conviction that SCHIP works and is worthy of public investment. We need facts. [Emphasis added.] Wow. I mean, wow. I see three possible outcomes. One, all that cognitive dissonance causes Roob’s head to explode. Two, the Church hierarchy dispatches its goons to burn this heretic at the stake for noticing that their god has no clothes. Three, the Left decides “to hell with it,” admits that it has a religion, and files for tax-exempt status. This article appeared on July 7, 2008 on [email protected]

Chapter 7

Still Don’t Think Universal Coverage Is a Religion? by Michael F. Cannon

In case my last post didn’t convince you that universal coverage is a religion, here is its apostle’s creed: To believe in universal health care is to believe that we can do more and do better, all at once—that it is possible to have hospitals full of high technology and emergency departments with room for all comers; that it is possible for people to choose their doctors and have a say in their treatments; that it is possible to make the economy more free and more efficient; and that it is possible to do all of this for everybody, not just an economically or medically privileged few, in a way we can all find affordable. [Emphasis added.] (As delivered by Church of Universal Coverage high priest Jonathan Cohn and chronicled in the book Sick, chapter 9, p. 231.) I may think that government often serves the few at the expense of the many, that people respond to incentives, that tradeoffs are unavoidable, that there may be better ways to promote health, and that introducing coercion into human affairs creates more problems than it solves. But just try telling that to someone who believes.

The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World by Michael D. Tanner Cato Institute Policy Analysis no. 613 (March 18, 2008)

Introduction In his movie SiCKO, Michael Moore explores problems with the U.S. health care system and advocates the adoption of a government-run, single-payer system.1 Moore compares the U.S. system unfavorably with those of Canada, Great Britain, and France. Economist and New York Times columnist Paul Krugman also thinks the health care systems of France, Britain, and Canada are better than that of the United States.2 Physicians for a National Health Program points out that the United States is the “only industrialized country without national health care.”3 These and other critics of the U.S. health care system note that countries with such systems spend far less per capita on health care than the United States does and, by some measures, seem to have better health outcomes. These critics contend that by adopting a similar system the United States could solve many of the problems that currently afflict its health care system. As Krugman says, “The obvious way to make the U.S. health care system more efficient is to make it more like the systems of other advanced countries.”4 There is no doubt that the United States spends far more on health care than any other country, whether measured as a percentage of gross domestic product (GDP) or by expenditure per capita. As Figure 1 shows, the United States now spends close to 16 percent of GDP on health care, nearly 6.1 percent more than the average for other industrialized countries.5 Overall health care costs are rising faster than GDP growth and now total more than $1.8 trillion, more than Americans spend on housing, food, national defense, or automobiles.6 Health care spending is not necessarily bad. To a large degree, America spends money on health care because it is a wealthy nation and chooses to do so. Economists consider health care a “normal good,” meaning that spending is positively correlated with income. As incomes rise, people want more of that good. Because we are a wealthy nation, we can and do demand more health care.7 Figure 1 Total Expenditure on Health Care as a Percentage of GDP

But because of the way health care costs are distributed, they have become an increasing burden on consumers and businesses alike. On average, health insurance now costs $4,479 for an individual and $12,106 for a family per year. Health insurance premiums rose by a little more than 6 percent in 2007, faster on average than wages.8 Moreover, government health care programs, particularly Medicare and Medicaid, are piling up enormous burdens of debt for future generations. Medicare’s unfunded liabilities now top $50 trillion. Unchecked, Medicaid spending will increase fourfold as a percentage of federal outlays over the next century.10 At the same time, too many Americans remain uninsured. Although the number of uninsured Americans is often exaggerated by critics of the system, approximately 47 million Americans are without health insurance at any given time.11 Many are already eligible for government programs; many are young and healthy; many are uninsured for only a short time.12 Yet there is no denying that a lack of insurance can pose a hardship for many Americans.13 Finally, although the U.S. health care system can provide the world’s highest quality of care, that quality is often uneven. The Institute of Medicine estimates that some 44,000–90,000 annual deaths are due to medical errors,14 while a study in The New England Journal of Medicine suggests that only a little more than half of American hospital patients receive the clinical standard of care. 15 Similarly, a RAND Corporation study found serious gaps in the quality of care received by American children.16 Many critics of U.S. health care suggest that the answers to these problems lie in a single-payer,

national health care system.17 Under such a system, health care would be financed through taxes rather than consumer payments or private insurance. Direct charges to patients would be prohibited or severely restricted. Private insurance, if allowed at all, would be limited to a few supplemental services not covered by the government plan. The government would control costs by setting an overall national health care budget and reimbursement levels. However, a closer look at countries with national health care systems shows that those countries have serious problems of their own, including rising costs, rationing of care, lack of access to modern medical technology, and poor health outcomes. Countries whose national health systems avoid the worst of these problems are successful precisely because they incorporate market mechanisms and reject centralized government control. In other words, socialized medicine works—as long as it isn’t socialized medicine.

Measuring the Quality of Health Care across Countries Numerous studies have attempted to compare the quality of health care systems. In most of these surveys, the United States fares poorly, finishing well behind other industrialized countries. This has led critics of the U.S. health care system to suggest that Americans pay more for health care but receive less. There are several reasons to be skeptical of these rankings. First, many choose areas of comparison based on the results they wish to achieve, or according to the values of the com-parer. For example, SiCKO cites a 2000 World Health Organization study that ranks the U.S. health care system 37th in the world, “slightly better than Slovenia.”18 (See Table 1.) This study bases its conclusions on such highly subjective measures as “fairness” and criteria that are not strictly related to a country’s health care system, such as “tobacco control.” For example, the WHO report penalizes the United States for not having a sufficiently progressive tax system, not providing all citizens with health insurance, and having a general paucity of social welfare programs. Indeed, much of the poor performance of the United States is due to its ranking of 54th in the category of fairness. The United States is actually penalized for adopting Health Savings Accounts and because, according to the WHO, patients pay too much out of pocket.19 Such judgments clearly reflect a particular political point of view, rather than a neutral measure of health care quality. Notably, the WHO report ranks the United States number one in the world in responsiveness to patients’ needs in choice of provider, dignity, autonomy, timely care, and confidentiality.20 Table 1 WHO Health Care Rankings Country France Italy San Marino Andorra

Difficulties even arise when using more neutral categories of comparison. Nearly all cross-country rankings use life expectancy as one measure. In reality though, life expectancy is a poor measure of a health care system. Life expectancies are affected by exogenous factors such as violent crime, poverty, obesity, tobacco and drug use, and other issues unrelated to health care. As the Organisation for Economic Co-operation and Development explains, “It is difficult to estimate the relative contribution of the numerous nonmedical and medical factors that might affect variations in life expectancy across countries and over time.”21 Consider the nearly three-year disparity in life expectancy between Utah (78.7 years) and Nevada (75.9 years), despite the fact that the two states have essentially the same health care systems.22 In fact, a study by Robert Ohsfeldt and John Schneider for the American Enterprise Institute found that those exogenous factors are so distorting that if you correct for homicides and accidents, the United States rises to the top of the list for life expectancy.23 Similarly, infant mortality, a common measure in cross-country comparisons, is highly problematic. In the United States, very low birth-weight infants have a much greater chance of being brought to term with the latest medical technologies. Some of those low birth-weight babies die soon after birth, which boosts our infant mortality rate, but in many other Western countries, those high-risk, low birth-weight infants are not included when infant mortality is calculated.24 In addition, many countries use abortion to eliminate problem pregnancies. For example, Michael Moore cites low infant mortality rates in Cuba, yet that country has one of the world’s highest abortion rates, meaning that many babies with health problems that could lead to early deaths are never brought to term.25 When you compare the outcomes for specific diseases, the United States clearly outperforms the rest

of the world. Whether the disease is cancer, pneumonia, heart disease, or AIDS, the chances of a patient surviving are far higher in the United States than in other countries. For example, according to a study published in the British medical journal The Lancet, the United States is at the top of the charts when it comes to surviving cancer. Among men, roughly 62.9 percent of those diagnosed with cancer survive for at least five years. The news is even better for women: the five year-survival rate is 66.3 percent, or twothirds. The countries with the next best results are Iceland for men (61.8 percent) and Sweden for women (60.3 percent). Most countries with national health care fare far worse. For example, in Italy, 59.7 percent of men and 49.8 percent of women survive five years. In Spain, just 59 percent of men and 49.5 percent of women do. And in Great Britain, a dismal 44.8 percent of men and only a slightly better 52.7 percent of women live for five years after diagnosis.26 Notably, when former Italian prime minister Silvio Berlusconi needed heart surgery last year, he didn’t go to a French, Canadian, Cuban, or even Italian hospital—he went to the Cleveland Clinic in Ohio.27 Likewise, Canadian MP Belinda Stronach had surgery for her breast cancer at a California hospital. 28 Berlusconi and Stronach were following in the footsteps of tens of thousands of patients from around the world who come to the United States for treatment every year. 29 One U.S. hospital alone, the Mayo Clinic, treats roughly 7,200 foreigners every year. Johns Hopkins University Medical Center treats more than 6,000, and the Cleveland Clinic more than 5,000. One out of every three Canadian physicians sends a patient to the Unites States for treatment each year, 30 and those patients along with the Canadian government spend more than $1 billion annually on health care in this country.31 Moreover, the United States drives much of the innovation and research on health care worldwide. Eighteen of the last 25 winners of the Nobel Prize in Medicine are either U.S. citizens or individuals working here.32 U.S. companies have developed half of all new major medicines introduced worldwide over the past 20 years.33 In fact, Americans played a key role in 80 percent of the most important medical advances of the past 30 years.34 As shown in Figure 2, advanced medical technology is far more available in the United States than in nearly any other country.35 The same is true for prescription drugs. For example, 44 percent of Americans who could benefit from statins, lipid-lowering medication that reduces cholesterol and protects against heart disease, take the drug. That number seems low until compared with the 26 percent of Germans, 23 percent of Britons, and 17 percent of Italians who could both benefit from the drug and receive it.36 Similarly, 60 percent of Americans taking anti-psychotic medication for the treatment of schizophrenia or other mental illnesses are taking the most recent generation of drugs, which have fewer side effects. But just 20 percent of Spanish patients and 10 percent of Germans receive the most recent drugs.37 Of course, it is a matter of hot debate whether other countries have too little medical technology or the Unites States has too much.38 Some countries, such as Japan, have similar access to technology. Regardless, there is no dispute that more health care technology is invented and produced in the United States than anywhere else.39 Even when the original research is done in other countries, the work necessary to convert the idea into viable commercial products is most often done in the United States.40 By the same token, not only do thousands of foreign-born doctors come to the United States to practice medicine, but foreign pharmaceutical companies fleeing taxes, regulation, and price controls are increasingly relocating to the United States.41 In many ways, the rest of the world piggybacks on the

U.S. system. Figure 2 Number of MRI Units and CT Scanners per Million People

Obviously there are problems with the U.S. system. Too many Americans lack health insurance and/or are unable to afford the best care. More must be done to lower health care costs and increase access to care. Both patients and providers need better and more useful information. The system is riddled with waste, and quality of care is uneven. Government health care programs like Medicare and Medicaid threaten future generations with an enormous burden of debt and taxes. Health care reform should be guided by the Hippocratic Oath: First, do no harm. Therefore, before going down the road to national health care, we should look more closely at foreign health care systems and examine both their advantages and their problems. Many of the countries with health systems ranked in the top 20 by the World Health Organization, such as San Marino, Malta, and Andorra, are too small to permit proper evaluation, or their circumstances clearly limit the applicability to the U.S. health care system. Accordingly, this study will look at 12 countries that appear to hold lessons for U.S. health care reforms: 10 ranked in the top 20 by the WHO and 2 others frequently cited as potential models for U.S. health care reform.

Types of National Health Care Systems National health care, or universal health care, is a broad concept and has been implemented in many

different ways. There is no single model that the rest of the world follows. Each country’s system is the product of its unique conditions, history, politics, and national character, and many are undergoing significant reform. Single-Payer Systems Under a single-payer health care system, the government pays for the health care of all citizens. It collects taxes, administers the supply of health care, and pays providers directly. In effect, this replaces private insurance with a single government entity. Typically, the government establishes a global budget, deciding how much of the nation’s resources should be allocated to health care, and sets prices or reimbursement rates for providers. In some cases, providers may be salaried government employees. In others, they may remain independent and be reimbursed according to the services and procedures they provide. In the strictest single-payer systems, private insurance and other ways to “opt out” of the system are prohibited. This is the type of system advocated by Michael Moore, Paul Krugman, Dennis Kucinich, and Physicians for a National Health Program, among others. Employment-Based Systems Countries with employment-based systems require that employers provide workers with health insurance, often through quasi-private “sickness funds.” These insurance funds may operate within or across industry sectors, with benefits and premiums set by the government. Often premiums are simply a form of payroll tax paid directly to the fund. Providers remain independent and reimbursement rates are negotiated with the funds, sometimes individually, sometimes on a national level. Germany has long been the model for an employment-based system. Managed Competition Managed competition leaves the provision of health care in private hands but within an artificial marketplace run under strict government control and regulation.42 In most cases, the government mandates that individuals purchase insurance, though this is often paired with a requirement for employers to provide insurance to their workers. Individuals have a choice of insurers within the regulated marketplace and a choice of providers. Although the government sets a standard benefits package, insurers may compete on price, cost sharing, and additional benefits. Switzerland is the clearest example of a managed-competition approach to universal coverage, although the Netherlands has also recently adopted a similar system. The 1993 Clinton health plan, the 2006 Massachusetts health care reform, and most of the proposals advocated by the current Democratic presidential candidates are variations of managed competition.43 Within these broad categories are significant differences. Some countries, such as France and Japan, impose significant cost sharing on consumers in an effort to discourage overutilization and to control costs. Other countries strictly limit the amount that consumers must pay out of pocket. Some countries permit free choice of providers, while others limit it. In some countries there is widespread purchase of alternative or supplemental private insurance, whereas in others, private insurance is prohibited or used very little. Resource allocation and prioritization vary greatly. Japan spends heavily on technology but limits reimbursement for surgery, while France has exceptionally high levels of prescription drug use. Outcomes also vary significantly. Canada, Great Britain, Norway, and Spain all heavily ration health care or have long waiting lists for care, while France and Switzerland have generally avoided waiting lists. At the same time, France, Italy, and Germany are struggling with rising health care costs and budget

strain, compared with Canada and Great Britain which have done better at containing growth in expenditures. And some countries such as Greece have fallen far short of claims of universal coverage. With all of that in mind, consider the following prominent national health care systems.

France Some of the most thoughtful proponents of national health care look to France as a model of how such a program could work. Jonathan Cohn of theNew Republic has written that “the best showcase for what universal health care can achieve may be France.”44 Ezra Klein of the American Prospect calls France “the closest thing to a model structure out there.”45 The French system ranks at or near the top of most cross-country comparisons and is ranked number one by the WHO.46 Although the French system is facing looming budgetary pressures, it does provide at least some level of universal coverage and manages to avoid many of the problems that afflict other national health care systems. However, it does so in large part by adopting market-oriented approaches, including consumer cost sharing. Other aspects of the system appear to reflect French customs and political attitudes in such a way that would make it difficult to import the system to the United States. France provides a basic level of universal health insurance through a series of mandatory, largely occupation-based, health insurance funds. These funds are ostensibly private entities but are heavily regulated and supervised by the French government. Premiums (funded primarily through payroll taxes), benefits, and provider reimbursement rates are all set by the government. In these ways the funds are similar to public utilities in the United States. The largest fund, the General National Health Insurance Scheme, covers most nonagricultural workers and their dependents, about 83 percent of French residents. Separate insurance plans cover agricultural workers, the self-employed, and certain special occupations like miners, transportation workers, artists, clergy, and notaries public. Another fund covers the unemployed. These larger insurance schemes are broken down into smaller pools based on geographic region. Overall, about 99 percent of French citizens are covered by national health insurance. The French health care system is the world’s third most expensive, costing roughly 11 percent of GDP, behind only the United States (17 percent) and Switzerland (11.5 percent). Payroll taxes provide the largest source of funding. Employers must pay 12.8 percent of wages for every employee, while employees contribute an additional 0.75 percent of wages, for a total payroll tax of 13.55 percent. In addition, there is a 5.25 general social contribution tax on income (reduced to 3.95 percent on pension income and unemployment benefits). Thus, most French workers are effectively paying 18.8 percent of their income for health insurance. Finally, dedicated taxes are assessed on tobacco, alcohol, and pharmaceutical company revenues.47 In theory, the system should be supported by these dedicated revenues. In reality, they have not been sufficient to keep the program’s finances balanced. The National Health Authority sets a global budget for national health care spending, but actual spending has consistently exceeded those targets.48 In 2006, the health care system ran a €10.3 billion deficit. This actually shows improvement over 2005, when the system ran an €11.6 billion deficit. 49 The health care system is the largest single factor driving France’s overall budget deficit, which has grown to €49.6 billion, or 2.5 percent of GDP,

threatening France’s ability to meet the Maastricht criteria for participation in the Eurozone. 50 This may be just the tip of the iceberg. Some government projections suggest the deficit in the health care system alone could top €29 billion by 2010 and €66 billion by 2020.51 In general, the funds provide coverage for inpatient and outpatient care, physician and specialist services, diagnostic testing, prescription drugs, and home care services. In most cases, the services covered are explicitly specified in regulation. However, some “implicit” benefit guarantees occasionally result in conflicts over what benefits are and are not fully covered.52 Most services require substantial copay-ments, ranging from 10 to 40 percent of the cost. As a result, French consumers pay for roughly 13 percent of health care out of pocket, roughly the same percentage as U.S. consumers.53 Moreover, because many health care services are not covered, and because many of the best providers refuse to accept the fee schedules imposed by the insurance funds, more than 92 percent of French residents purchase complementary private insurance.54 In fact, private insurance now makes up roughly 12.7 percent of all health care spending in France, a percentage exceeded only by the Netherlands (15.2 percent) and the United States (35 percent) among industrialized countries.55 The combination of out-of-pocket and insurance payments means that nongovern-ment sources account for roughly 20 percent of all health care spending, less than half the amount spent in the United States but still more than most countries with national health care systems.56 The private insurance market in France is in many ways less regulated than the U.S. market. For example, while 20 U.S. states require some form of community rating or put limits on health insurance premiums, private health insurance in France is largely experience rated. No regulations specify what benefits must be included in coverage or mandate “guaranteed issue”; and pre-existing conditions may be excluded. The only significant restriction requires “guaranteed renewability” after two years of coverage.57 More than 118 carriers currently offer some form of private health insurance coverage.58 In general, French patients pay up front for treatment and are then reimbursed by their government health insurance fund and/or private insurance. The amount of reimbursement, minus the copayment, is based on a fee schedule negotiated between health care providers and the national health insurance funds. These fee schedules operate similarly to the diagnostic-related groups (DRGs) under the U.S. system. Although reimbursement levels are set by the government, the amount physicians charge is not. The French system permits providers to charge more than the reimbursement schedule, and approximately one-third of French physicians do so.59 In some areas, such as Paris, the percentage of physicians who bill above reimbursement schedules runs as high as 80 percent.60 In general, however, competition prevents most physicians from billing too far outside negotiated rates; and physicians employed by hospitals, as opposed to those in private practice, do not have the same ability to charge more than the negotiated rate. The government also sets reimbursement rates for both public and private hospitals, which are generally not allowed to bill beyond the negotiated fee schedules. While fees are restricted, private hospitals (called cliniques), which account for 37 percent of all short-stay hospital beds and half of all surgical beds, control their own budgets, whereas public hospitals operate under global annual budgets imposed by the Ministry of Health. Health care technology that the National Health Authority has categorized as “insufficient medical service rendered” cannot be purchased by public hospitals, and its use at cliniques is not reimbursable

through national insurance schemes.61 Yet in denying reimbursement for such technology, the French government admits that when a product with an insufficient medical service rendered is de-listed from reimbursement, this does not imply that it is not efficient for a given pathology, but simply that the government prefers to commit its resources to other reimbursements which it deems more useful from a collective point of view.”62 In general, the quality of French health care is high, but there are problem areas. Until very recently, the French have generally had quick access to their primary care physician of choice. Now, a growing problem, nomadisme medical, wherein patients go from one doctor to another until they find one whose diagnosis they prefer, is driving up costs to the system. 63 The government has responded by increasing copayments and attempting to limit physician reimbursements. Much of the burden for cost containment in the French system appears to have fallen on physicians. The average French doctor earns just €40,000 per year ($55,000), compared to $146,000 for primary care physicians and $271,000 for specialists in the United States. This is not necessarily bad (there is no “right” income for physicians) and is partially offset by two benefits: 1) tuition at French medical schools is paid by the government, meaning French doctors do not graduate with the debt burden carried by U.S. physicians, and 2) the French legal system is tort-averse, significantly reducing the cost of malpractice insurance.64 The French government also attempts to limit the total number of practicing physicians, imposing stringent limits on the number of students admitted to the second year of medical school.65 However, French physicians have shown growing resistance to efforts at limiting physician reimbursement with several recent strikes and protests.66 In the face of growing budgetary problems, future conflict may well be brewing. More significantly, the government has recently begun imposing restrictions on access to physicians. A 2004 study by the High Council on the Future of Health Insurance raised questions about “the legitimacy of the complete freedom enjoyed by health professionals in setting up their private practice.”67 And in 2005, the government adopted a system of “coordinated care pathways.” Under the new system, which operates very much like managed care in the United States, patients are encouraged to choose a “preferred doctor” and to follow the “pathway” suggested by that doctor. The effect is both to lock patients into a choice of primary care physician and to establish a “gatekeeper” who limits access to specialists, tests, and some advanced treatment options.68 So far, the new system has been more of a gentle push than a mandate. If the new system is not used, copayments may be slightly higher or reimbursements slightly lower, much like going “out of network” in the United States. But if costs continue to rise, the new system may be extended and made more rigorous. Of more immediate concern, global budgets and fee restrictions for hospitals have led to a recurring lack of capital investment, resulting in a shortage of medical technology and lack of access to the most advanced care. For example, the United States has eight times as many MRI units per million people and four times as many CT scanners as France.69 This partially reflects the more technology-reliant way of practicing medicine in the United States, but it has also meant delays in treatment for some French patients. Also, strong disparities are evident in the geographic distribution of health care resources, making access to care easier in some regions than others.70 Thus, while the French system has generally

avoided the waiting lists associated with other national health care systems, limited queues do exist for some specialized treatments and technologies. In some cases, hospitals in danger of exceeding their budgets have pushed patients to other facilities to save money.71 Finally, the government has tried to curtail the use of prescription drugs. The French have long had an extremely high level of drug consumption. French general practitioners (GPs) prescribe on average €260,000 worth of drugs a year. 72 However, the National Health Authority has begun de-listing drugs from its reimbursement formulary. 73 Many French patients have responded by switching to similar, reimbursable drugs, but some patients may not be getting the medicine they need. For example, one study found that nearly 90 percent of French asthma patients are not receiving drugs that might improve their condition.74 Government regulation and bureaucracy have also been blamed for rigidity in the French system, preventing it from reacting quickly to changing circumstances. For example, mismanagement and the inability of the system to cope with emergencies were blamed in part for the deaths of 15,000 elderly individuals in the summer of 2003 during the European heat wave; and a shortage of hospital beds occurred in 2004 when a nationwide flu and bronchitis epidemic broke out.75 Although the changes made so far do not amount to rationing, 62 percent of French citizens report that they “have felt the effects” of the new restrictions.76 Slightly less than half consider the waiting time between diagnosis and treatment to be acceptable.77 Valentin Petkantchin, a scholar with the Institut Economique Molinari, warns that France is in danger “of joining the group of countries [such as] the UK and Canada, where the existence of rationing of health care and waiting lists raises serious questions of access to treatments by those who need them.”78 And some French health professionals have suggested that waiting times for care have begun to lengthen.79 The impact of all these cost containment measures is alleviated to some degree by the ability of French patients to privately contract for care outside the public system. If a drug is removed from the national formulary, patients may still purchase it if they are willing to pay for it themselves. The same is true for technology. Likewise, patients may ignore the “coordinated care pathway” and accept higher prices, paying more for immediate access. In addition, the added resources from payments by private insurance have increased the supply of health care technology and services. By increasing the overall amount of capital available for investment above and beyond the restrictions imposed by the government system, private insurance payments increase the number of hospital beds and the amount of technology available within the system. The capital infused through private insurance may also increase the number and training of physicians.80 In essence, the French system avoids widespread rationing because, unlike true single-payer systems, it employs market forces. Even the OECD says that the “proportion of the population with private health insurance” and the degree of cost sharing are key determinants of how severe waiting lists will be: Waiting lists for elective surgery generally tend to be found in countries which combine public health insurance (with zero or low patient cost sharing) and constraints on surgical capacity. Public health insurance removes from patients the financial barriers to access leading to high potential demand. Constraints on capacity . . . prevent supply from matching this demand. Under such circumstances, non-price rationing, in the form of waiting lists, takes over from price rationing as a means of equilibrating supply and demand.81

And Ezra Klein praises the French because [France’s ability to hold down health care costs] is abetted by the French system’s innovative response to one of the trickier problems bedeviling health-policy experts: an economic concept called “moral hazard.” Moral hazard describes people’s tendency to overuse goods or services that offer more marginal benefit without a proportionate marginal cost. Translated into English, you eat more at a buffet because the refills are free, and you use more health care because insurers generally make you pay up front in premiums, rather than at the point of care. The obvious solution is to shift more of the cost away from premiums and into co-pays or deductibles, thus increasing the sensitivity of consumers to the real cost of each unit of care they purchase.82 However, the benefits of private insurance are not equally distributed. The wealthy are more likely to be able to pay privately to escape the government system, creating in essence a two-tier system. That has resulted in a disparity in health outcomes based on income.84 While this is certainly the case in the United States and elsewhere—and there is nothing wrong with the wealthy being able to pay more to receive better care—it demonstrates that the professed goal of entirely equal access is largely unattainable even under this government-run health system. A 2004 poll showed that the French had the highest level of satisfaction with their health care system among all European countries. This is partly because their hybrid system has avoided many of the biggest problems of other national health care systems. Yet it also stems from French social character. For example, by a three-to-one margin, the French believe the quality of care they receive is less important than everyone having equal access to that care.85 This means the French experience may not be easily transferable to the United States, which has a far less egalitarian ethic. While satisfied with their care today, the French do express concern about the future. In particular, they acknowledge the need for greater cost control. This leads to the standard contradiction inherent in government services: most people are opposed to paying more (either through higher taxes or out of pocket), yet they worry that cost-control measures will lead to a deterioration of care in the future. There is no consensus on what French health care reform would look like. Still, some 65 percent of French adults believe that reform is “urgent,” and another 20 percent believe reform is “desirable.”86 Moreover there is growing dissatisfaction with the French welfare state—of which the health care system is a significant part—and the level of taxes necessary to support it. The recent election of French president Nicolas Sarkozy is widely regarded as a reflection of this new attitude.87 Indeed, the new French government has made a crackdown on health care spending one of its top priorities..88 To sum up: the French health care system clearly works better than most national health care systems. Despite some problems, France has generally avoided the rationing inherent in other systems. However, the program is threatened by increasing costs and may be forced to resort to rationing in the future. The French system works in part because it has incorporated many of the characteristics that Michael Moore and other supporters of national health care dislike most about the U.S. system. France imposes substantial cost sharing on patients in order to discourage over-utilization, relies heavily on a relatively unregulated private insurance market to fill gaps in coverage, and allows consumers to pay extra for better or additional care, creating a two-tier system. This is clearly not the commonly portrayed style of national health care.

Italy Italy’s national health care system is rated second in the world by the WHO. 89 Yet a closer examination shows the system to be deeply troubled, plagued with crippling bureaucracy, mismanagement and general disorganization, spiraling costs, and long waiting lists. Generally, the Italian system is similar to the British National Health Service but enjoys more decentralization. The central government sets goals on how money should be spent, monitors the overall health status of the nation, and negotiates the labor contracts of medical staff. The Italian Constitution was changed in 2001 such that the national government now sets the “essential levels of care” regions must meet, but regional governments still control their own autonomous budgets and distribute resources to the local level. In theory, under the “fiscal federalist” provisions of this reform, discretionary central transfers should have dropped sharply, local tax bases and tax sharing should have increased, and “equalizing” transfers should have been standardized and linked to objectives for controlling costs and increasing quality. However, poorer regions and powerful special interests have strongly resisted these changes. Reform therefore remains incomplete, and financial transfers from the central government are still based on historical spending patterns.90 Thus, while the national Ministry of Health continues to outline funding needs based on weighted capitation and past spending, recent reforms have shifted more and more power and responsibility to regional governments who set their own budgets. The regions establish one or more Local Health Authorities, which are responsible for the provision of care either through government-run hospitals and clinics or by contracting with private providers.91 It should be noted that governance in Italy is often as much art as science, and regions frequently fail to implement rules, guidelines, reimbursement schedules, and budgets set by the central government.92 Financing comes from both payroll taxes and general revenues. Payroll taxes have a regressive structure, starting at 10.6 percent of the first €20,660 of gross income and decreasing to 4.6 percent of income between €20,661 and €77,480. The remainder of funding comes from both federal and regional general taxation, including income and value-added taxes.93 The central government redistributes resources to compensate to some degree for inequalities among regions. Even so, most regional health authorities run significant deficits. Overall, regional deficits top 1.8 percent of GDP.94 Inpatient care and primary care are free at the point of treatment. However, copayments are required for diagnostic procedures, specialists, and prescription drugs.95 The size of such copayments has crept steadily upward over the past decade and now runs as high as 30 percent for some services.96 Several attempts have been made to impose copayments for a broad range of services, including primary care, but have collapsed in the face of public protests.97 In addition, nearly 40 percent of the population (the elderly, pregnant women, and children) are exempt from copayments.98 Italians have limited choice of physician. They must register with a general practitioner within their LHA. They may choose any GP in the LHA but may not go outside it. Except for emergency care, a referral from a GP is required for diagnostic services, hospitalization, and treatment by a specialist. Despite these limits, Italians enjoy more choice of physician than do the British or Spanish. Most physicians are reimbursed on a capi-tated basis (i.e., according to the number of patients served

over a given time period rather than the services actually provided), although some hospital physicians receive a monthly salary. Hospitals are generally reimbursed according to DRGs, with rates set by the central government—though regions sometimes disregard those rates and set their own. Private health insurance is available in Italy but is not widespread. Where offered, it is usually provided by employers. About 10 percent of Italians have private health insurance, below the percentage in most OECD countries. According to the insurance industry, this is partly because it is not possible to opt out of the National Health System and because health insurance premiums are not tax deductible.99 Private health insurance allows free choice of doctors, including specialists, and treatment in private hospitals. Even without private insurance, however, many Italians use private health resources (and presumably pay out of pocket). Estimates suggest that as much as 35 percent of the population uses at least some private health services.100 Although Italy spends a relatively low percentage of GDP on health care, expenditures have been rising rapidly in recent years and have consistently exceeded government forecasts.101 Between 1995 and 2003, total health care spending rose by 68 percent.102 The Italian government has taken various steps to try to control costs, such as reducing reimbursement rates, increasing copayments, reducing capital expenditures, contracting with private providers, and limiting prescription drugs. All of these measures have met with protests, including physician strikes, and many have been repealed after only a short time.103 The Italian government does not provide official information on waiting lists, but numerous studies have shown them to be widespread and growing, particularly for diagnostic tests. For example, the average wait for a mammogram is 70 days; for endoscopy, 74 days; for a sonogram, 23 days. 104 Undoubtedly, this is due in part to a shortage of modern medical technology. The United States has twice as many MRI units per million people and 25 percent more CT scanners.105 Ironically, the bestequipped hospitals in northern Italy have even longer waiting lists since they draw patients from the poorer southern regions as well.106 If delays become excessive, patients may seek permission from the regional government to obtain treatment from private doctors or hospitals at NHS expense. A recent court decision allows patients whose life would be endangered by delays under the NHS to seek treatment in private hospitals even without prior permission from the regional government. Italy has imposed a relatively strict drug formulary as well as price controls, and has thereby succeeded in reducing pharmaceutical spending, long considered a problem for the Italian health care system. In 2006, Italian drug prices fell (or were pushed) 5 percent, even as drug prices rose in the United States and much of the rest of the world. However, the savings came at a cost: the introduction of many of the newest and most innovative drugs was blocked.107 Conditions in public hospitals are considered substandard, particularly in the south. They lack not just modern technology, but basic goods and services; and overcrowding is widespread. Conditions are frequently unsanitary. For example, one of the largest public hospitals in Rome was recently found to have garbage piled in the hallways, unguarded radioactive materials, abandoned medical records, and staff smoking next to patients.108 Private hospitals are considered much better and some regions have contracted with private hospitals to treat NHS patients. Dissatisfaction with the Italian health care system is extremely high, by some measures the highest in

Europe.109 In polls, Italians say that their health care system is much worse than that of other countries and give it poor marks for meeting their needs. Roughly 60 percent of Italians believe that health care reform is “urgent,” and another 24 percent believe it is “desirable.” In general, Italians believe that such reform should incorporate market-based solutions. More than two-thirds (69 percent) believe that giving patients more control over health care spending will improve the system’s quality. And 55 percent believe that it should be easier for patients to spend their own money on health care.110 However, given the general dysfunction of the Italian political system, and the entrenched opposition of special interest groups, substantial reform is not likely anytime soon.

Spain Spain’s national health care system operates on a highly decentralized basis, giving primary responsibility to the country’s 17 regions. The Spanish Constitution guarantees all citizens the “right” to health care, including equal access to preventive, curative, and rehabilitative services; but responsibility for implementing the country’s universal system is being devolved to regional governments. The degree and speed of devolution is uneven, however, with some regions only recently achieving maximum autonomy.111 Coverage under the Spanish system is nearly universal, estimated at 98.7 percent of the population. The system provides primary health care, including general health and pediatric care, outpatient and inpatient surgery, emergency and acute care, long-term disease management, and prescription drugs (although some drugs may require a copayment). Many mental health services, particularly outpatient services, are excluded, as is cosmetic surgery.112 The federal government provides each region with a block grant. The money is not earmarked: the region decides how to use it. The block grant itself is based primarily on a region’s population with some consideration given to other factors such as the population’s demographics. Regions may use their own funds to supplement federal monies. Not surprisingly, health care spending varies widely from region to region. The differences in expenditures, as well as in spending priorities, lead to considerable variance in the availability of health resources. For example, Catalonia has more than 4.5 hospital beds per 1,000 residents, while Valencia has just 2.8.113 Spanish patients cannot choose their physicians, either primary care or specialists. Rather, they are assigned a primary care doctor from a list of physicians in their local community. If more specialized care is needed, the primary care physician refers patients to a network of specialists. Unlike U.S. managed care, it is not possible to go “out of network” unless the patient has private health insurance (see below). This has sparked an interesting phenomenon whereby sick Spaniards move in order to change physicians or find networks with shorter waiting lists. Waiting lists vary from region to region but are a significant problem everywhere. On average, Spaniards wait 65 days to see a specialist, and in some regions the wait can be much longer. For instance, the wait for a specialist in the Canary Islands is 140 days. Even on the mainland, in Galacia, the wait can be as long as 81 days. For some specialties the problem is far worse, with a national average of 71 days for a gynecologist and 81 days for a neurologist.114 Waits for specific procedures are also lengthy. The

mean waiting time for a prostectomy is 62 days; for hip replacement surgery, 123 days.115 Some health services that U.S. citizens take for granted are almost totally unavailable. For example, rehabilitation, convalescence, and care for those with terminal illness are usually left to the patient’s relatives. There are very few public nursing and retirement homes, and few hospices and convalescence homes.116 As with most other national health care systems, the waiting lists and quality problems have led to the development of a growing private insurance alternative. About 12 percent of the population currently has private health insurance. (This amounts to double coverage since opting out of the government system is not allowed.117 ) In larger cities such as Madrid and Barcelona, the number of privately insured reaches as high as 25 percent. Overall, private insurance payments account for 21 percent of total health care exenditures.118 More commonly, Spaniards pay for care outside of the national health care system out of pocket. In fact, nearly 24 percent of health care spending in Spain is out of pocket, more than any European country except Greece and Switzerland, and even more than the United States.119 Here again, a two-tier system has developed, with the wealthy able to buy their way around the defects of the national health care system, and the poor consigned to substandard services.120 There are also shortages of modern medical technologies. Spain has one-third as many MRI units per million people as the United States, just over one-third as many CT units, and fewer lithotripters.121 Again, there is wide variation by region. For example, two regions, Ceuta and Melilla, do not have a single MRI unit.122 The regional variation is important because Spaniards face bureaucratic barriers in trying to go to another region for treatment. All hospital-based physicians and approximately 75 percent of all other physicians are considered quasi–civil servants and are paid a salary rather than receiving payment based on services provided. Compensation is based on years of practice or the attainment of certain professional credentials, with across-the-board annual increases unrelated to merit, performance, or patient satisfaction.123 As a result, Spain has fewer physicians and fewer nurses per capita than most European countries and the United States. The lack of primary care physicians is particularly acute.124 Even so, Spaniards are generally happy with their system. Nearly 60 percent describe their system as good, the second highest favor-ability rating in Europe. (France was first.)125 Accordingly, health care reform does not rank high on the average Spaniard’s political agenda. One observer described health care as “conspicuous by its absence as a major issue” in recent elections.126 Only about 46 percent of Spaniards describe the need for reform as “urgent,” while 35 percent see reform as “desirable.” And Spaniards are less inclined toward market-based reforms than most other European countries. Only 42 percent of Spaniards believe that it should be easier for patients to spend their own money on health care, and only 58 percent believe that giving patients more control over spending will improve quality. However, Spaniards do want more choice of doctors and hospitals, and they want the government to do a better job of dealing with waiting lists.127

Japan Japan has a universal health insurance system centered primarily around mandatory, employment-

based insurance. On the surface, Japan’s national health insurance program defies easy description, comprising some 2,000 private insurers and more than 3,000 government units. However, in a broader sense, the system encompasses four principal insurance schemes. The Employee Health Insurance Program requires companies with 700 or more employees to provide workers with health insurance from among some 1,800 “society-managed insurance” plans. Nearly 85 percent of these plans cover a single company and can be thought of as similar to the self-insurance plans operated by many large U.S companies. Most of the rest are industry-based. About 26 percent of the population participates in these plans.128 Such plans are financed through mandatory employer and employee contributions, effectively a payroll tax. The total contribution averages around 8.5 percent of wages. It is generally split evenly between employer and employee, although some companies assume slightly more than half the contribution. As a result, workers contribute about 45 percent of payments overall.129 It should be noted that studies have found that the majority of the burden of the employer’s contribution to health insurance is borne by the employees in the form of reduced wages.130 These contributions are frequently insufficient to operate the insurance plans. In 2003, more than half lost money.131 A number of companies have responded by dissolving their individual plans and entering larger industry-based plans. However, growing costs continue to pressure many businesses. Workers in businesses with fewer than 700 workers must enroll in the government-run, small-business national health insurance program. This plan covers about 30 percent of the population and is funded primarily through mandatory contributions, around 8.2 percent of wages, and supplemented by government funds.132 The self-employed and retirees are covered under the Citizens Insurance Program administered by municipal governments. Funding comes primarily from a self-employment tax, but additional revenues come from an assessment on the society-managed insurance programs discussed above and the small business program. General revenue contributions from the national government are used to plug shortfalls. Finally, the elderly are covered through a fund financed by contributions from the other three schemes, as well as contributions from the central government. The elderly do not pay directly into this plan, known as the Roken, but contribute to the plan they were enrolled in while employed. The Roken is simply a cost-sharing mechanism.134 A number of small programs exist to handle special populations such as farmers, fishermen, and government workers. The unemployed remain under their former employers’ plan, although they are not required to continue contributing. Private supplemental insurance exists, but very few Japanese carry it. Private health insurance pays for less than 1 percent of total Japanese health care spending. Benefits under all four schemes are extremely generous, including hospital and physician care, as well as dental care, maternity care, prescription drugs, and even some transportation costs. There are no restrictions on hospital or physician choice and generally no preauthorization or gatekeeper requirements. Significant copayments accompany most services, ranging from 10 percent to, more commonly, 30 percent (capped at $677 per month for a middle-income family). As a result, the average Japanese household pays about $2,300 per year out of pocket.135 Overall out-of-pocket expenditures amount to roughly 17 percent of total health care spending. The vast majority of hospitals and clinics in Japan are privately owned, but because the government

sets all fee schedules, the distinction between privately and publicly owned is irrelevant for patients. Reimbursement for both hospitals and clinics is on a fee-for-service basis, with the government setting fees and prescription prices. The fee schedule is identical for inpatient and outpatient treatment. Because hospitals must absorb both physician and capital costs from the same level of reimbursement, the tendency has been to shift patients to outpatient services.136 Recently, some attempts have been made to introduce alternate reimbursement mechanisms for hospitals, including DRGs and Diagnosis and Procedure Combinations— classification systems that tie reimbursements more closely to the resources that a particular patient consumes. But the medical establishment has resisted, and only about 80 hospitals participate in the experiment.137 Hospital physicians are salaried employees. Nonhospital physicians work in the private sector, and the government sets their reimbursement schedules. Generally, reimbursement is on a fee-for-service basis, although recently some chronic conditions have been “price bundled” into a single fee. Reimbursement schedules are set within the context of an overall global budget on health spending, but the division of resources is the subject of extensive negotiation with providers. The fee schedule reflects both the Japanese style of medicine and attempts to contain costs. For example, because of a strong cultural bias against invasive procedures, surgery tends to be reimbursed at a much lower rate than nonsurgical procedures.138 The fee-setting system has had serious corruption problems. Because the fees for each of more than 3,000 procedures or services are set individually and adjusted every two years on an individual basis, it is possible to manipulate particular fees without attracting much attention.139 In 2004, a group of dentists was indicted for bribing the fee-setting board.140 In addition, the reimbursement schedule for physicians creates an incentive for them to see as many patients as possible. The result is assembly line medicine. Two-thirds of patients spend less than 10 minutes with their doctor; 18 percent spend less than 3 minutes.141 On the other hand, the Japanese, like Americans, practice a very technology-intensive style of medicine. Capital investment in technology has been given high priority, and the Japanese have at least as much access to technology such as MRI units, CT scanners, and lithotripters as patients in the United States.142 Because the government imposes uniform fee schedules on hospitals, there is no price competition. Instead, hospitals attempt to lure patients by having the best technology. While this can benefit patients, it has also led to queues at the best hospitals and a black market with “under the table” payments for faster access.143 Some restrictions have been added in the last few years, capping the number of diagnostic imaging procedures that a hospital can perform in a calendar month, as well as reducing the fees for those services.144 These changes have not led to visible rationing yet but could in the future. To date, Japan has done a fairly good job of controlling costs without resorting to the rationing common in many universal care systems. This is due in part to factors outside the health care system, such as generally healthy lifestyles, low vehicle accident rates, low crime rates, low rates of drug abuse, and other cultural factors.145 One study estimated that 25 percent of the difference in health care spending between the United States and Japan is attributable to a lower incidence of disease and 15 percent to less aggressive practice styles.146 But rationing has also been avoided through the management

of the health care system and the imposition of significant consumer cost sharing. Nonetheless, spending is beginning to escalate, especially in government-managed programs such as the Roken, where there has been less of an attempt at cost sharing and cost containment. As one observer explained: We Japanese have a tendency to go to the hospital even when we have only minor ailments such as the flu, headaches, or stomach aches. If medical expenses are not high and we do not feel well, then why not go see a doctor and get some medication. . . . The result, of course, is that waiting rooms of clinics and hospitals are full of people. Everyone is welcome and there are, in fact, regular customers. Sometimes elderly people come to see a friend and the hospital waiting room becomes a sort of salon.147 This problem is aggravated by the demographics of a rapidly aging society. By some estimates, the elderly are responsible for 90 percent of the aggregate increase in Japan’s health care costs. 148 If current trends continue, Japan will almost triple its government spending on health care in the next 20 years.149 And the situation will only grow less stable with time. Japan is expected to lose 35 million workers by 2050, with 35 percent of its population in retirement.150 This raises questions of how a system that relies on payroll taxes for funding can continue to fund rising costs even as its payroll base shrinks.

Norway Norway has a universal, tax-funded, single-payer, national health system. All Norwegian citizens, as well as anyone living or working in Norway, are covered under the National Insurance Scheme. Norwegians can, however, opt out of the government system by paying out of pocket. In addition, many Norwegians go abroad for treatment to avoid the waiting lists endemic under the government program.151 The system is financed through general tax revenues, with no earmarked or dedicated tax for health care.152 Thus, health care becomes one large contributor to a tax burden that consumes 45 percent of GDP. Among industrialized countries, only Sweden has a higher tax burden.154 Benefits are extensive and include inpatient and outpatient care, diagnostic services, specialist care, maternity services, preventive medicine, palliative care, and prescription drugs. At public hospitals, there are no charges for stays or treatment, including drugs. However, small copayments may be charged for outpatient treatment and for treatment by a general practitioner, psychologist, or psychiatrist. The program also provides “sick pay” and disability benefits.155 As Michael Moore has noted, the Norwegian system will even pay for “spa treatments” in some cases.156 Although the central government retains overall responsibility for and authority over the system, some management and funding responsibilities have devolved to regional and municipal governments. In general, municipal governments are responsible for primary health care, while four regional health authorities are responsible for specialist care.157 Prior to 2002, public hospitals were run by local or county governments. In the face of chronic problems, notably long waiting lists and rising costs, the central government took direct control of all public hospitals in January 2002.158 A small number of

private hospitals do exist outside the public system. The government sets a global budget limiting overall health expenditures, and setting capital investment expenditures for hospitals. Most general practitioners and physician specialists outside hospitals receive a fixed salary, although some specialists working on a contract basis receive both an annual grant and feefor-service payments. Reimbursement rates are set by the government and balance-billing is prohibited. Most other health care personnel are salaried government employees.159 Patient choice of physician is constrained. All Norwegian citizens must choose a general practitioner from a government list. The GP acts as a gatekeeper for other services and providers. Patients may switch GPs, but no more than twice per year and only if there is no waiting list for the requested GP. 160 Specialists may only be seen with a referral from the GP. The Norwegian health care system has experienced serious problems with long and growing waiting lists.161 Approximately 280,000 Norwegians are estimated to be waiting for care on any given day (out of a population of just 4.6 million).162 The average wait for hip replacement surgery is more than four months; for a prostectomy, close to three months; and for a hysterectomy, more than two months. 163 Approximately 23 percent of all patients referred for hospital admission have to wait longer than three months for admission.164 The Norwegian government has responded by repeatedly and unsuccessfully attempting to legislate waiting lists out of existence. For example, under the 1990 Patients’ Rights Act, patients with a condition that would lead to “catastrophic or very serious consequences” have a right to treatment within six months, if the treatment is available.165 In 2001, after several government reports had documented repeated violations of this policy, the government passed a new mandate requiring that a patient’s medical condition be at least “assessed” within 30 days.166 Despite these paper guarantees, waiting lists have not been substantially reduced.167 Moreover, such delays may represent only the tip of the iceberg when it comes to rationing care in Norway. In some cases, care may be denied altogether if it is judged not to be cost-effective. As Knut Erik Tranoy, Professor Emeritus at the Centre for Medical Ethics of the University of Oslo and an original member of the government’s Health Care Priorities Commission, explains: It is important to see (a) that, in a public health service of the Nordic type, any given amount of resources always has alternative uses. And (b) it is neither medically nor morally defensible to put scarce resources to uses which will fore-seeably yield less favorable outcomes than other uses— save fewer lives, cure fewer patients.168 Tranoy differentiates between Norwegian-style systems of national health care and “a health care system where patients buy services in a market, and where justice means equality of opportunity to buy what you need. Decisions about alternative use are then (largely) patients’ decisions.”169 While Norwegians generally report that they are “fairly satisfied” with the way their health care system is run, there has been growing discontent over such issues as the ability to choose a health care provider, involvement in decisions regarding care or treatment, and waiting times—which has been an ongoing issue in Norwegian politics.170 However, at this time there doesn’t appear to be any widespread movement for larger reform.

Portugal The Portuguese health care system is a classic, universal, centrally run National Health System, a single-payer system funded through taxes with comprehensive benefits provided free or with little cost at the point of service.171 Also, a number of occupation-related health insurance schemes—originally intended to be integrated into the NHS—now coexist with it. The primary source of care is the NHS, which is funded primarily through general tax revenues, accounting for approximately 13 percent of all government expenditures.172 In theory, the NHS operates within an annual global budget for health care spending. In reality, it regularly exceeds this budget by a wide margin, necessitating supplemental funding. Portugal is one of the few OECD countries where public health care spending has been rising as a proportion of total health spending, up more than four percentage points since 1997.173 Theoretically, benefits under the NHS include all necessary inpatient and outpatient health care services including specialists, diagnostic tests, mother and child care, and prescription drugs. On paper, no health-related expense is specifically excluded from coverage by the NHS, though in reality services such as dental care and rehabilitation therapy are seldom provided.174 Copayments are required for diagnostic tests, hospital admissions, consultations with specialists, and prescription drugs, where copayments can run to 40 percent or higher.175 Primary care physicians and hospital-based physicians are public employees, paid directly by the NHS. However, NHS doctors are permitted to practice privately as well, and roughly half do so. 176 Specialists are often in private practice and are reimbursed by the NHS on a contractual basis. About 25 percent of the population, mostly government workers, military, telecommunication workers, and their families, remain under a series of industry or occupation-based insurance schemes, known collectively as “subsystems,” which are a legacy of the country’s pre-NHS health care system.177 These plans were originally intended to be incorporated into the NHS, but their powerful constituencies have prevented that from occurring.Participants in the subsystems pay a premium equal to approximately 1 percent of their salary. Benefits are generally superior to those offered through the NHS.178 Not surprisingly, premiums fall far short of what is needed to finance benefits. The resulting shortfall is shifted to the NHS. In addition, approximately 10 percent of the population has private insurance, usually through their employer.179 Private insurance generally pays for hospital and specialty care but not for primary care physicians. Policies are medically underwritten and have no requirement for renewability, meaning insurers can raise premiums or drop customers with extremely high claims.180 Choice of provider is heavily constrained under the NHS. Every citizen must choose a primary care physician from a list of those available within a specified geographic area.This area is usually based on the person’s area of residence but may be based on the area of employment. The average general practitioner serves as many as 1,500 people, though some may have more than 2,000 patients, leading to long waits and difficulties in getting appointments. People may change GPs only by applying in writing to the NHS and explaining their reasons.181 Access to specialists or hospital care, except in emergencies, requires referral from the patient’s GP. Since this is often difficult to secure in a timely manner, patients often seek care through hospital

emergency rooms. By some estimates, at least 25 percent of emergency room patients do not need immediate treatment.182 Despite guarantees of “universal coverage,”access to care remains a serious problem. Waiting lists are so long and so prevalent that the European Observatory on Health Systems says that they veer toward “de facto rationing.”183 Currently, more than 150,000 Portuguese are on waiting lists for surgery, out of a population of just 10.6 million.184 However, that may understate the problem in poorer and rural areas, which have fewer health resources and less access to care.185 Modern health technology is far less available than in the United States. The United States has almost seven times more MRI units per million people, and 20 percent more CT scanners.186 To avoid waiting lists, Portuguese patients frequently pay out of pocket to see physicians in private practice. In some cases, Portuguese patients have crossed the border to receive treatment in Spain.187 While there appears to be a consensus in Portugal that the system needs some kind of reform, weak governments and strong structural interest groups have combined to prevent the development of any consensus over the direction reform should take.188 For the moment, Portugal drifts.

Greece Although ostensibly an employer-based system, the Greek system operates more like a single-payer system in that it is highly centralized and regulated. Virtually every aspect of health care financing and provision is strictly controlled by the Ministry of Social Health and Cohesion.189 Some attempts have been made to decentralize decisionmaking, with 17 regional organizations having some responsibility for implementing policy and managing the delivery of health care, but most power remains with the central government. Greek employers must enroll their workers in one of 35 “social insurance funds,” funded in part through a payroll tax and in part through general tax revenues. Unlike Germany, where employers have a choice among competing sickness funds, Greek social insurance funds are specific to industry sectors. The range of benefits offered by each fund, the contribution rates, and the types of providers that the insured can access are all determined by the Ministry of Social Health and Cohesion.190 Certain funds known as “noble funds,” primarily used by government workers, the banking sector, and public utility workers, offer more extensive benefits and require smaller worker contributions. The powerful unions representing workers from these sectors have consistently blocked attempts to merge these funds with other social insurance funds or to allow buy-ins from other industry sectors.191 Social insurance funds reimburse doctors in two ways. Some providers are employed directly by the funds at fund-operated clinics and are effectively salaried employees. Others practice privately but contract with funds to provide care. Contract physicians are reimbursed on a fee-for-service basis, but reimbursement rates are extremely low. Balance-billing is prohibited. In theory, funds provide first-dollar coverage, with no deductibles and low copayments for only a few services. However, as discussed below, most physicians demand “informal”payments in exchange for treatment. In addition to the social insurance funds, the National Health Service employs physicians and operates

hospitals. The NHS operates parallel to the social insurance funds, acting essentially as a back-up mechanism, although it may be the principal provider of health services in some rural areas. It also provides health care for the uninsured and the elderly. In addition to NHS hospitals, other public hospitals contract with the social insurance funds. In both cases, the Ministry of Social Health and Cohesion determines not only the hospital’s budget, but the number of personnel, the specialties of the personnel, salary levels, number of beds, and the purchase of technology. Budgets are rigidly monitored and hospital administrators have little leeway. 192 Hospitals are reimbursed on a per diem payment system, a type of a fixed charge.193 NHS hospitals in particular are considered substandard. Most suffer from severe staffing shortages caused by low pay and poor living conditions in rural areas. It has been estimated that less than half of authorized medical positions are actually filled.194 Low salaries have also led to personnel shortages in public hospitals associated with social insurance funds.195 A series of reforms implemented in 2005 imposed a referral requirement for hospital admissions. Patients seeking free treatment in a public NHS hospital must have a referral from a general practitioner, who acts as a gatekeeper. Private practice physicians may not make referrals to public or NHS hospitals.196 Unfortunately, general practitioners are in severely short supply. Greece needs an estimated 5,000 general practitioners to meet demand. In actuality it has only around 600.197 Despite overlapping health plans, the Greek system falls short of universal coverage. About 83 percent of the population is covered for primary care (on par with the United States), and about 97 percent for hospital care.198 In theory, the uninsured can always receive treatment by walking into an NHS clinic or hospital. Only about 8 percent of Greeks have private supplemental health insurance, although this percentage has risen substantially in the past few years and further growth is predicted.199 Accurate information on waiting lists is difficult to come by. According to the WHO, “although ‘patient registries’ at the hospital level do exist, there is no systematic data processing available at any level of care,” to provide adequate analysis.200 However, most observers agree that waiting lists are a severe problem at almost every level of care, and particularly bad at both NHS and public hospitals. An examination of waiting lists at Athens hospitals by the Ta Nea newspaper found the wait for surgery was as long as six months; for an outpatient appointment with either the hypertension or neurology departments, 150 days. Even simple blood tests required a month-long wait.201 The Greek system has developed a level of endemic corruption as patients have sought ways around the system’s rationing, bureaucracy, and inefficiencies. For example, Greeks routinely provide physicians with “informal” payments for seeing a patient from a sickness fund that has not contracted with the doctor, for moving a patient up in the queue, or for providing treatment outside government guidelines. In addition, physicians actively attempt to persuade patients to move from a doctor’s sickness fund contract to the doctor’s private practice. Patients who switch pay out of pocket but receive faster and better care. Even NHS physicians see private patients on the side. (This practice was illegal until 2002 but went on despite the prohibition).202 Physicians also receive payments for referrals to private hospitals or diagnostic centers. Such informal outof-pocket payments made up 42 percent of total health expenditures in 2002, fully 4.5 percent of GDP. 203 Essentially, the Greek health care system is funded through payroll taxes, general tax revenue, and bribery. In addition, the health care bureaucracy has become highly politicized. Every staff appointment in the

public health sector must be approved at the ministry level. All hospital administrators and other health officials are appointed on the basis of political affiliation with the governing party, often with little regard for relevant training or other qualifications.204 Not surprisingly, Greece has far less modern health care technology than the United States. The United States has more than twice as many MRI units per million people and 20 percent more CT scanners.205 Much of the state-of-the-art equipment that does exist is clustered in the country’s small number of private clinics and hospitals. Indeed, the vast majority of high technology biomedical tests are performed by the private sector.206 One study summed up the problems with the Greek health care system this way: The Greek health system does not yet offer universal coverage and has fragmented funding and delivery. Funding is regressive, with a reliance on informal payments, and there are inequities in access, supply and quality of services. Inefficiencies arise from an over reliance on relatively expensive inputs, as evidenced by the oversupply of specialists and undersupply of nurses. Resource allocation mechanisms are historical and political with no relation to performance or output; therefore providers have little incentive to improve productivity.207 That would appear to be a fairly accurate summary.

Netherlands Aside from Switzerland, the Netherlands has perhaps the most market-oriented national health care system in Europe. That was the case even before 2006, when a series of reforms introduced even more market mechanisms. The old pre-2006 Dutch system resembled Germany’s. Dutch workers with incomes below €32,600 were required to enroll in one of 30 government-controlled “sickness funds.” Those with higher incomes had the option of enrolling in the funds if they wished, or opting out of the government system and purchasing private insurance. Sickness funds were financed through a payroll tax and a flat-rate, per-capita premium.208 The funds provided a uniform package of benefits including physician and hospital care, specialist care, diagnostic tests, prescription drugs, and dental care for children.209 While consumers could switch funds annually, there was little competition between funds and few consumers actually switched. The new Dutch system operates on the theory of managed competition like Switzerland (see below). Both the social health insurance program and the alternative private health insurance option were replaced by a requirement that all Dutch citizens purchase a basic health insurance plan from one of 41 private insurance companies. Although a fine may be imposed for failure to comply, there is no comprehensive system for identifying citizens who do not meet the mandate. An estimated 1.5 to 2 percent of the population is currently uninsured.210 The required plan, which covers minimum benefits set by the government, includes general practitioner and specialist care, hospital stays, some dental care, prenatal care, some medicines, and travel expenses. In one interesting innovation, most of the required benefits are specified in terms of “functions of care”

rather than by provider category. Thus, “rehabilitation care” is required, but no particular type of rehabilitation provider is mandated.211 This may mean that the benefits package will be less susceptible to manipulation by provider interest groups, but it is much too early to tell. The Health Ministry sets premiums, which average around €100 per month for an individual. Insurance companies can offer varying deductibles, ranging from €150 to €1,000 per year, allowing for a small level of price competition. Policies can also offer rebates of up to €225 if a policyholder uses no health services in a given year beyond seeing a primary care physician.212 About 90 percent of the population also buys supplemental insurance covering services over and above the required standard benefits package.213 Employers generally pay half of insurance premiums, with individual workers picking up the other half.214 Individual premiums are tax deductible.215 Subsidies, or care allowances, that help low- and middle-income income workers purchase the basic insurance plan are extensive and reach well into the middle class. Currently, 5 million Dutch citizens qualify for some level of subsidy on a sliding scale based on income.216 Those subsidies are financed through a tax on salaried workers. Because of the high levels of subsidy, the Dutch government remains a large source of health spending, one area of significant difference with the Swiss system.217 Insurers negotiate quality, quantity, and price of services with providers. Notably, many insurers require providers to document the quality of the care they provide, frequently relying on evidence-based guidelines and performance metrics.218 Some insurers provide care directly, using their own staffs and their own facilities, such as primary care centers and pharmacies. Other insurers contract with a network of providers similar to U.S. preferred provider organizations (PPOs). Patients can go out of network but will receive only partial reimbursement. Most insurers require a referral from a primary care provider before a patient can see a specialist.219 Pharmaceutical prices are capped nationwide at the average price of medicines in a therapeutic class. Individuals may choose more expensive drugs but must pay the difference out of pocket.220 The new system has been in place for only two years, which is not enough time to permit a thorough evaluation. However, preliminary indications suggest that it is an improvement over the pre-2006 system.221 Dutch consumers appear to have embraced the reforms. Consumer organizations are participating in negotiations with providers, insurers, and lawmakers. The system is becoming more transparent, with far greater information available regarding both price and quality. Consumers seem willing to make decisions and change insurers on the basis of price and quality. Price competition under the new system has increased significantly and at least 20 percent of Dutch consumers have switched insurers.222 When the system was initiated, the Dutch government predicted premiums would cost €1,106 on average. However, competition has forced the average premium down to €1,028, 097.6 percent below the prediction.223 Overall, the new system is estimated to have increased the purchasing power of Dutch households by as much as 1.5 percent.224 However, not everyone has been a winner. The community rating requirement has resulted in steep increases in premiums for younger workers who were more heavily subsidized under the old system.225 Under the old system, waiting lists were widespread—for example, more than three months for a hip

replacement and two months for a prostectomy or hysterectomy. 226 One study estimated that at least 100 heart patients died each year while on waiting lists.227 Early evidence suggests that some improvement has come as a result of the 2006 reforms.228 Hospitals are beginning to compete by expanding services such as neurosurgery and radiation therapy.229 Although some experts have expressed concern that smaller hospitals offering these services may not have sufficient utilization rates to ensure quality and efficacy, the expanded availability of services will likely increase access to care and reduce queues.230 The new system may even be having a positive impact on health care costs. Since the new system took effect, health care costs have been growing at an annual rate of just 3 percent, compared to more than 4.5 percent in the year before the reforms.231 The jury is still out, and the Dutch system still falls well short of a true free market, but the Netherlands appears to have taken a big step in the right direction.

Great Britain Almost no one disputes that Britain’s National Health Service faces severe problems, and few serious national health care advocates look to it as a model. Yet it appears in Moore’s movie SiCKO as an example of how a national health care system should work, so it is worth examining. The NHS is a highly centralized version of a single-payer system. The government pays directly for health care and finances the system through general tax revenues. Except for small copayments for prescription drugs, dental care, and optician services, there are no direct charges to patients. Unlike many other single-payer systems such as those in Canada and Norway, most physicians and nurses are government employees. For years, British health policy has focused on controlling spending and in general has been quite successful, with the system spending just 7.5 percent of GDP on health care. 232 Yet the system continues to face serious financial strains. In fiscal year 2006, the NHS faced a deficit of £700 million, according to government figures, and as much as £1 billion, according to outside observers.233 This comes despite a £43 billion increase in the NHS annual budget over the past five years.234 By some estimates, NHS spending will have to nearly triple by 2025 just to maintain the current level of services.235 And that level of services leaves much to be desired. Waiting lists are a major problem. As many as 750,000 Britons are currently awaiting admission to NHS hospitals. These waits are not insubstantial and can impose significant risks on patients. For example, by some estimates, cancer patients can wait as long as eight months for treatment.236 Delays in receiving treatment are often so long that nearly 20 percent of colon cancer patients considered treatable when first diagnosed are incurable by the time treatment is finally offered.237 In some cases, to prevent hospitals from using their resources too quickly, mandatory minimum waiting times have been imposed. The fear is that patients will flock to the most efficient hospitals or those with smaller backlogs. Thus a top-flight hospital like Suffolk East PCT was ordered to impose a minimum waiting time of at least 122 days before patients could be treated or the hospital would lose a portion of its funding.238 As the Daily Telegraph explained:

In a real competitive market, increased demand can allow prices to rise, thus increasing profits, which allow the market to grow. Efficient producers can then reduce their unit costs and their prices, and so give a better deal to the consumer. The prevailing logic is that the more customers who are served—or products that are sold—in a given period of time, the better the business does. But PCTs have budgets that are predetermined by Whitehall spending limits, and there is no way for them to conjure extra revenue out of the air or to grow their market. As a result, the hospitals that are most successful in providing prompt treatment are running through the finite resources of their PCTs at an unacceptably rapid rate.239 The problem affects not only hospitals. There are also lengthy waits to see physicians, particularly specialists. In 2004, as a cost-cutting measure, the government negotiated low salaries for general practitioners in exchange for allowing them to cut back the hours they practice. Few are now available nights or weekends.240 Problems with specialists are even more acute. For example, roughly 40 percent of cancer patients never get to see an oncology specialist.241 The government’s official target for diagnostic testing is a wait of no more than 18 weeks by 2008. In reality, it doesn’t come close. 242 The latest estimates suggest that for most specialties, only 30 to 50 percent of patients are treated within 18 weeks. For trauma and orthopedics patients, the figure is only 20 percent. Overall, more than half of British patients wait more than 18 weeks for care.243 Explicit rationing also exists for some types of care, notably kidney dialysis, open heart surgery, and some other expensive procedures and technologies.244 Patients judged too ill or aged for the procedures to be cost-effective may be denied treatment altogether. Recently, the British government introduced some tiny steps toward market-based reforms. Under the experimental London Patient Choice Project, patients who have been waiting longer than six months for treatment are offered a choice of up to four alternate providers. This experiment has been extended nationwide for coronary heart patients who have been waiting longer than six months.245 Some proposed solutions are far more radical. David Cameron, leader of the Conservative Party, has proposed that the NHS be allowed to refuse treatment to individuals who don’t practice healthy lifestyles, for example, who smoke or are overweight. Then again, he has also proposed that the government pay for gym memberships and subsidize the purchase of fresh fruit and vegetables.246 A small but growing private health care system has emerged in the UK. About 10 percent of Britons have private health insurance. Some receive it through their employer, while others purchase it individually. In general, the insurance replicates care provided through the NHS and is purchased to gain access to a wider choice of providers or to avoid waiting lists.247 Private health insurance is lightly regulated and risk-rating is allowed. The British government treats health insurance more or less the same as other types of insurance.248 The British public is well aware of the need for reform. Nearly two-thirds of Britons (63 percent) say that the need for reform is “urgent,” while another 24 percent believe it is “desirable.” Fully 60 percent of Britons believe that making it easier for patients to spend their own money on health care would improve quality. 249 Yet Britons are also extremely proud of their health care system and wary of any reforms that would “Americanize” it.

Switzerland Of all the countries with universal health care, Switzerland has one of the most market-oriented systems. Indeed, the Swiss government actually pays for a smaller amount of total health care expenditures than the U.S. government, 24.9 percent versus 44.7 percent.250 (See Figure 3.) The Swiss system is based on the idea of managed competition, the same concept that underlay the 1993 Clinton health care plan and Mitt Romney’s reforms in Massachusetts. 251 Managed competition leaves the provision of health care and health insurance in private hands but creates a highly regulated artificial marketplace as a framework within which the health care industry operates.252 Swiss law requires all citizens to purchase a basic package of health insurance, an individual mandate. Coverage is close to universal, estimated at 99.5 percent.253 This level of compliance is due in part to the Swiss national character and may not be replicable in the United States where the record of complying with mandates is much more mixed (even if such a mandate were desirable).254 For example, nearly 100 percent of Swiss drivers comply with their country’s mandate for automobile insurance, compared with only 83 percent of U.S. drivers.255 The term “basic benefits package” is somewhat misleading since the required benefits are quite extensive, including inpatient and outpatient care, care for the elderly and the physically and mentally handicapped, long-term nursing home care, diagnostic tests, prescription drugs, and even complementary and alternative therapies.256 Insurance is generally purchased on an individual basis. Few employers contribute to the purchase or provide insurance.257 The policies are provided by private insurers. Currently, some 93 insurers operate in Switzerland, although not every insurer operates in every canton, or region.258 Originally, insurers were required to be nonprofit entities, but that restriction was eliminated in 2002. Insurers cannot reject an applicant on the basis of health status, and all policies are community rated within a geographic area, meaning that the healthier pay higher premiums to subsidize the less healthy. One exception to community rating is for nonsmokers, who can receive premiums as much as 20 percent lower than smokers. A formula adjusts premiums based on sex and age. 259 The geographic variation can be significant, with premiums differing as much as 50 percent between cantons.260 Figure 3 Percentage of Total Health Spending Paid by Government

Unable to compete on the basis of managing and pricing risk, and required to offer nearly identical basic benefits packages, insurers compete primarily on price. Since they cannot reduce costs by risk management or benefit design, they generally manage prices by varying the level of deductibles and copayments. Individuals can purchase expensive policies with very low deductibles and copayments, or far less expensive policies with high deductibles or extensive copay-ments. Thus, premiums vary according to their cost-sharing attributes and plan type, running from $1,428 per year for a plan with a deductible of approximately $2,000 to $2,388 for a plan with a $250 deductible.261 Because employers do not pay for workers’ health insurance, the Swiss are exposed to the full cost of their insurance purchases. As a result, many Swiss have opted for high-deductible insurance. Thus, with high deductibles and extensive copayments, the Swiss pay out of pocket for 31.5 percent of health care, twice as much as in the United States.262 (See Figure 4.) Recently, there has also been a growing market in managed care plans that, like those in the United States, offer lower premiums in exchange for limitations on access to specialists and other services. Premiums for such plans run around $1,900 per year.263 The Swiss government offers subsidies to low-income citizens to help them purchase a policy. Subsidies are based on both income and assets, and the maximum available subsidy covers the cost of an average premium in the individual’s canton. These subsidies are designed to prevent any individual from having to pay more than 10 percent of income on insurance. They do not, however, pay the entire cost of insurance because the Swiss do not want to create an incentive for subsidized individuals to choose the most expensive plan with the lowest deductibles and copay-ments.264 Roughly one-third of Swiss citizens receive some form of subsidy, and approximately 19 percent of all health insurance premiums are paid with government funds.265 Figure 4

Swiss insurers operate as cartels to negotiate provider reimbursements on a cantonal basis. Providers must accept the negotiated payment, and balance-billing is prohibited. If insurers and providers are unable to reach agreement on a fee schedule, canton governments are empowered to step in and impose an agreement. There are no restrictions on where physicians may set up practice, so to some degree providers can vote with their feet, moving to cantons that offer higher reimbursements, a practice that has led to physician shortages in some areas.267 The system includes both public and private hospitals.268 Private hospitals negotiate reimbursement with insurance cartels and physicians in the same manner. Public hospitals are operated by cantons, which negotiate reimbursement rates with insurers and provide subsidies to the hospitals. In some cantons, individuals with only the basic insurance plan must use public hospitals; supplementary insurance (see below) is required for admission to private hospitals. Recently some providers have begun operating outside the negotiated fee schedules. A separate supplemental insurance market is starting to develop to cover the cost of these providers, which are presumed to offer higher quality or more advanced services. Supplementary insurance also allows access to private hospitals in those cantons that do not permit access under the basic insurance plan. Even within public hospitals, supplementary insurance can be used to pay for services such as private rooms that are not covered under the basic plan. By some estimates as many as 40 percent of Swiss citizens have purchased supplemental insurance.269 The Swiss do not impose a global budget on their health care system and have therefore avoided the waiting lists common in other systems. In addition, the Swiss have a high degree of access to modern

medical technology, but it has come at a cost. The Swiss spend 11.5 percent of GDP on health care, second only to the United States.270 Since Swiss health care consumers are exposed to the cost consequences of their health care decisions, this trade-off between access and cost can be presumed to reflect the desires of Swiss patients. They have chosen high quality care even though it costs them more. Given that economists consider health care to be a “normal good”—that is, consumption rises along with income—and Switzerland is a wealthy nation, such a decision seems entirely reasonable.271 At the same time, it is notable that Swiss health care spending remains below that of the United States for nearly comparable care. Strong evidence suggests that the exposure of Swiss consumers to the cost consequences of their health care decisions has made them more conscious consumers and helped limit overall health care costs. As Regina Herzlinger and Ramin Parsa-Parsi of Harvard have concluded, “Cost control may be attributed to the Swiss consumer’s significant role in health care payments and the resulting cost transparency.”272 The transparency of the system also makes it responsive to consumer preferences. The WHO survey ranked Switzerland second only to the United States in terms of responsiveness to patients’ needs for choice of provider, dignity, autonomy, timely care, and confidentiality.273 The Swiss generally seem pleased with their system. Earlier this year, Swiss voters overwhelmingly rejected a proposal to replace the current system with a single-payer plan; more than 71 percent of Swiss voters turned down the proposal in a nationwide referendum.274 Nonetheless, the Swiss system has its own problems, most of them predictable outgrowths of the individual mandate and the regulation inherent in managed competition. In most markets, consumers impose a certain discipline on prices because they can refuse to buy a product if it costs too much. The individual mandate removes this power since consumers must purchase the product (in this case, insurance) even if they believe the cost outweighs the value. Moreover, the establishment of a government-defined benefits package is an open-ended invitation to special interests representing various health care providers and disease constituencies, who can certainly be expected to lobby for the inclusion of additional services or coverage.275 Public choice dynamics are such that providers (who would make money from the increased demand for their services) and disease constituencies (whose members naturally have an urgent desire for coverage of their illness or condition) will always have a strong incentive to lobby legislators for inclusion under any minimum benefits package. The public at large will likely be unaware of the debate or see resisting the small premium increase caused by any particular additional benefit as unworthy of a similar effort—a simple case of concentrated benefits and diffused costs.276 That is exactly what has happened in Switzerland, leading to a growing expansion of the basic benefits package. In particular, a powerful hospital and physician lobbying coalition known as the “Blue Front” was able to demand a significant expansion in covered benefits in exchange for a relaxation of “any willing provider” laws so as to permit managed-care contracts.277 The expansion of benefits has driven up the cost of insurance, a cost only partially offset by larger deductibles. Although the proportion of health expenditures paid out of pocket remains high, it has decreased by roughly 10 percent in the past decade.278 Moreover, the growth in covered benefits has helped drive up costs for the system as a whole, as the Swiss become more insulated from the costs of their health care purchasing decisions. If that trend

continues, it could undermine the cost transparency that is at the heart of the Swiss system.” As Uwe Reinhardt has noted, “Over time, the growth in compulsory benefits has absorbed an increasing fraction of the consumers’ payment, thus compromising the consumer-driven aspects of the Swiss system.”279 Evidence shows that the community rating requirements are creating distortions within the Swiss market, leading to the over provision of care to the healthy and the under provision of care to the sick.280 In addition, the prohibition on risk management discourages the development of new and innovative products. Peter Zweifel of the University of Zurich, a member of the Swiss Competitive Committee which oversees insurance regulation, believes that a return to some degree of risk-rating is essential to the long-term success of the Swiss system.281 As Zweifel puts it, “Let competition work its magic. Let those who are bad risks get the message that they need to become better risks, if possible. If not possible, [they would] still get a subsidy which [keeps their costs] down to little more than 8–10 percent of taxable income.”282 Third, the cartel structure for negotiating reimbursement schedules can create a number of distortions. Effectively monopsony purchasers, the cartels have enormous leverage when it comes to negotiations. Not surprisingly, physicians have tended to set up practice in cantons with the highest levels of reimbursement, leading to shortages in other areas. Reimbursement rates have reportedly created wasteful incentives—for example, hospitals shifting patients from outpatient to inpatient care.283 And the combination of increased demand and low reimbursement has led to the first signs of queues for the most complex surgeries.284 In addition, the negotiations freeze in place a pricing structure that inhibits the development of innovative approaches that do not tie payments to specific benefits. This includes both managed care approaches and health services integration.285 Finally, Switzerland has some of Europe’s strongest regulation of nonphysician health care professionals.286 As a result, patients are often forced to use more expensive providers where a less expensive professional would do. All of the above combine to undermine the consumer-driven nature of Switzerland’s health system. Despite these problems, the Swiss system provides a useful lesson for the United States about the value of consumer-directed health care. In particular, we can see that when the cost of insurance becomes more transparent, consumers shift their purchasing preferences toward true insurance (spreading catastrophic risk), rather than purchasing prepayment for routine, low-cost services. That gives consumers an overall incentive to make cost-versus-value decisions when purchasing health care, resulting in reduced costs while maintaining individual choice and quality care.

Germany Germany ranked 25th in the WHO ratings.287 Despite that low ranking, however, the country is worth examining because it is frequently cited as a model by advocates of national health care. National health insurance in Germany is part of a social insurance system that dates back to Bismarck. All German citizens with incomes under €46,300 (roughly $60,000) are required to enroll in one of approximately 250 statutory “sickness funds.” Those with higher incomes may enroll in the funds if

they wish, or may opt out of the government system and purchase private insurance.288 About threequarters of workers with incomes above the statutory limit choose to remain in the sickness funds, which currently cover approximately 90 percent of the population. Overall, insurance coverage is nearly universal. However, the number of uninsured has been rising, roughly tripling in the last 10 years to 300,000 people.289 About 9 percent of the population purchases supplemental insurance to cover items that are not included in the standard benefits package.290 Sickness funds are financed through a payroll tax split equally between the employer and employee. The size of the tax varies depending on which fund the worker has chosen, but averages around 15 percent of wages.291 Sickness funds are supposed to be solvent and self-supporting, but in reality the system ran a €7 billion deficit in 2006.292 The German government has proposed a 1 percent increase in the payroll tax, split evenly between employer and employee, starting next year. 293 In addition, general tax revenues finance capital costs for acute care hospitals and many rehabilitative services, especially for retirees. Benefits are extensive, covering physicians, hospital and chronic care, diagnostic tests, preventive care, prescription drugs, and part of dental care. In addition to the medical benefits, sickness funds provide sick pay to those who cannot work due to illness, ranging from 70 to 90 percent of the patient’s last gross salary, for up to 78 weeks.294 The central government and state governments split the regulation of the health care system. The central government establishes the national global budget for health care spending, defines any new medical procedures to be included in benefit packages, and sets reimbursement rates for physicians. Some of this is accomplished through legislation, while the rest is handled through negotiations between the National Association of Sickness Funds and the National Association of Physicians. At the state level, state associations of sickness funds and physicians negotiate overall health budgets, reimbursement contracts for physicians, procedures for monitoring physicians, and reference standards for prescription drugs.295 The bargaining power in these negotiations clearly lies with the sickness funds backed by the government, allowing them to effectively impose fee schedules and other restrictions on providers. The purchasing power of a German physician’s wages is now about 20 percent that of a U.S. physician. 296 This has led to physician strikes as recently as 2005.297 Although Germany spends less on health care than the United States, both as a percentage of GDP and per capita, expenditures have been rising at an alarming rate in recent years. Friedrich Breyer, an economist from Konstanz University, estimates that health care spending could reach 30 percent of GDP by 2020 unless significant changes are made.298 The German government has responded by beginning to cut back on benefits. In 2004, sickness funds stopped covering eyeglasses, lifestyle medications, and all over-the-counter drugs. Copayments were imposed for the first time, such that Germans now pay €10 per quarter to see a general practitioner, €10 per day of hospital stay, €10 per prescription, and for certain specialty services. 299 The highest copayments are 10 percent for prescription drugs. Overall, Germans pay out of pocket for about 13 percent of total health care spending, only slightly less than Americans.300 Preliminary evidence suggests that the introduction of cost sharing has slightly reduced utilization and spending.301 In 2006, Chancellor Angela Merkel proposed a sweeping set of health care reforms that included creating a centralized health fund, shifting financing in part from payroll taxes to general revenues,

trimming benefits, imposing greater cost sharing, and making the system more transparent. She was forced to abandon the package in the face of public and political opposition.302 The degree of health care rationing in Germany is the subject of considerable debate. Unlike many OECD countries, the German government does not compile data on waiting lists.303 One frequently cited study suggests that Germans are no more likely than Americans to wait more than four weeks to see a specialist.304 The WHO says, “Waiting lists and explicit rationing decisions are virtually unknown.”305 However, at least one study concludes that rationing is occurring for the elderly and those with terminal illness, and concludes that “the question remains as to whether lives at advanced ages could be saved if age rationing were discontinued and maximum medical treatment were to be applied to everyone, irrespective of their age.”306 In addition, a survey of German hospitals reported that “waiting times were prolonged” due to both a lack of capacity and hospital target budgets that make the treatment of sickness fund patients with serious conditions financially unattractive.307 Also, Germans have less access to modern medical technology than Americans. The United States has four times as many MRI units per million people and twice as many CT scanners.308 The situation would undoubtedly be worse without the existence of the small private insurance sector. Although small as a proportion of total health spending, private insurance puts competitive pressure on sickness funds, pushing them to expand their quality and services. At one time, CT scanners were even rarer in the public system, available only under exceptional circumstances and after long waits, yet relatively common in the private sector. Competition forced the public sector to add more CT scanners.309 Some analysts blame price restrictions and reimbursement rates for increasing bureaucratic interference in how German physicians practice medicine. Physicians trying to work within the maze of reimbursement caps and budget restrictions have no financial incentive to provide more than the minimally necessary care. That has led to questions of quality assurance, and the government has responded with ever greater micromanagement of practice standards. The result has been a huge increase in red tape for physicians and a general loss of innovation.310 Germans seem aware of the need to reform their health care system. In a 2004 poll, 76 percent of Germans thought health care reform was “urgent,” while an additional 14 percent thought it was “desirable.” However, Germans are split nearly down the middle about what that reform should be. Roughly 47 percent would like to see an increase in private health care spending, whereas 49 percent would not. Similarly, 45 percent of Germans believe that more patient choice would improve health care quality, whereas 50 percent do not. The reluctance to fully embrace market reforms undoubtedly stems from a long-standing German belief in social solidarity. By a margin of 81 to 18 percent, Germans believe that equal access to the same quality of care for everyone is more important than their own access to the best possible care.311 Costs and demographics will eventually force changes in the German system. However, given the failure of Chancellor Merkel’s reforms, change is unlikely in the near future.

A Few Thoughts on Canada Canada is another country that did not make the top 20 health care systems in the WHO rankings (it

finished 30th), and few serious advocates of universal health care look to it as a model. As Jonathan Cohn puts it, “Nobody in the United States seriously proposes recreating the British and Canadian system here—in part because, as critics charge . . . they really do have waiting lines.”312 However, since the press still frequently cites it as an example, it is worth briefly examining. Although Canada is frequently referred to as having a “national health system,” the system is actually decentralized with considerable responsibility devolved to Canada’s 10 provinces and 2 territories. It is financed jointly by the provinces and the federal government, similar to the U.S. Medicaid program. In order to qualify for federal funds, each provincial program must meet five criteria: 1) universality— available to all provincial residents on uniform terms and conditions; 2) comprehensiveness—covering all medically necessary hospital and physician services; 3) portability—allowing residents to remain covered when moving from province to province; 4) accessibility—having no financial barriers to access such as deductibles or copayments; and 5) public administration—administered by a nonprofit authority accountable to the provincial government. Federal financing comes from general tax revenue. The federal government provides a block grant to each province which amounts to around 16 percent of health care spending. However, most funding comes from provincial taxes, primarily personal and corporate income taxes. Some provinces also use funds from other financial sources like sales taxes and lottery proceeds. And some (British Columbia, Alberta, and Ontario) charge premiums, although health services cannot be denied because of inability to pay. The health care system is an enormous part of the Canadian welfare state. On the provincial level, the health care system amounts to between one-third and one-half of all social welfare spending.313 Provinces must provide certain benefits, including primary care doctors, specialists, hospitals, and dental surgery. Other benefits, such as routine dental care, physiotherapy, and prescription drugs, are optional. Some provinces offer substantial coverage for these services, some cover them only partially, and some do not cover them at all. Except for emergencies, treatment by specialists or hospital admission requires a referral from a primary care physician. Provider reimbursement is set by each province, and some provinces restrict overall physician income. In general, however, reimbursement is on a fee-for-service basis. Hospitals are paid a specific pre-set amount to cover all noncapital costs. Capital expenditures must be approved on a case-by-case basis. An increasing number of Canadians also carry private insurance, most often provided through their employer. Originally this insurance was designed to cover those few services not covered by the national health care system. At one time, all provinces prohibited private insurance from covering any service or procedure provided under the government program. But in 2005, the Canadian Supreme Court struck down Quebec’s prohibition on private insurance contracting. 314 Litigation to permit private contracting is now pending in several other provinces. In addition to the public hospitals covered by the government, many private clinics now operate, offering specialized services. Although private clinics are legally barred from providing services covered by the Canada Health Act, many do offer such services in a black market. The biggest advantage of private clinics is that they typically offer services with reduced wait times compared to the public health care system. Obtaining an MRI scan in a hospital could require a wait of months, whereas it could be obtained much faster in a private clinic. Waiting lists are a major problem under the Canadian system. No accurate government data exists, but provincial reports do show at least moderate waiting lists. The best information may come from a survey of Canadian physicians by the Fraser Institute, which suggests that as many as 800,000 Canadians are

waiting for treatment at any given time. According to this survey, treatment time from initial referral by a GP through consultation with a specialist, to final treatment, across all specialties and all procedures (emergency, nonurgent, and elective), averaged 17.7 weeks in 2005. 315 And that doesn’t include waiting to see the GP in the first place. Defenders of national health care have attempted to discount these waiting lists, suggesting that the waits are shorter than commonly portrayed or that most of those on the waiting list are seeking elective surgery. A look at specialties with especially long waits shows that the longest waits are for procedures such as hip or knee replacement and cataract surgery, which could arguably be considered elective. However, fields that could have significant impact on a patient’s health, such as neu-rosurgery, also have significant waiting times.316 In such cases, the delays could be life threatening. A study in the Canadian Medical Association Journal found that at least 50 patients in Ontario alone have died while on the waiting list for cardiac catheterization.317 Data from the Joint Canada–United States Survey of Health (a project of Statistics Canada and the National Center for Health Statistics) revealed that “thirty-three percent of Canadians who say they have an unmet medical need reported being in pain that limits their daily activities.”318 In a 2005 decision striking down part of Quebec’s universal care law, Canadian Supreme Court Chief Justice Beverly McLachlin wrote that it was undisputed that many Canadians waiting for treatment suffer chronic pain and that “patients die while on the waiting list.”319 Clearly there is limited access to modern medical technology in Canada. The United States has five times as many MRI units per million people and three times as many CT scanners.320 Indeed, there are more CT scanners in the city of Seattle than in the entire province of British Columbia.321 Physicians are also in short supply. Canada has roughly 2.1 practicing physicians per 1,000 people, far less than the OECD average. Worse, the number of physicians per 1,000 people has not grown at all since 1990. And while the number of nurses per 1,000 people remains near the OECD average, that number has been declining since 1990.322 In addition, although national health care systems are frequently touted as doing a better job of providing preventive care, U.S. patients are actually more likely than Canadians to receive preventive care for chronic or serious health conditions. In particular, Americans are more likely to get screened for common cancers, including cancers of the breast, cervix, prostate, and colon.323 Canada has been relatively effective at controlling spending. The country spends about 9 percent of GDP on health care, a percentage that has risen only slightly over the last decade. Relative to average OECD expenditures, Canadian health expenditures have declined by 4 percent since 1997.324 That cost control, however, has clearly come at the expense of access to care. Canadians’ dissatisfaction with the problems in their system has been growing for some time. One survey showed that some 59 percent of Canadians believe that their system requires “fundamental changes,” and another 18 percent believe the system needs to be scrapped and totally rebuilt.325 Still, Canadians are reluctant to embrace market reforms that are associated with the U.S. health care system— a system that Canadians disdainfully reject. As one observer put it: Anxiety about Americanization and the constantly reinforced strain of national pride in Canadian health care coexist[s] with considerable uneasiness about the actual state of that care. It is as if, when Canadians look south across the border they swell with pride, but when they look within they shrink back, seeing many problems and feeling uncertainty about the future.

Canadians may jealously guard their system and resist “Americanizing” it, but even advocates of universal health care are coming to recognize that it does not provide a valid model for U.S. health care reform.

Conclusion The U.S. health care system clearly has problems. Costs are rising and are distributed in a way that makes it difficult for some people to afford the care they want or need. Moreover, although the number of uninsured Americans is often exaggerated, far too many Americans go without health insurance. And while the U.S. provides the world’s highest quality health care, that quality is uneven, and too often Americans don’t receive the standard of care that they should. But the experiences of other countries with national health care systems show that the answer to these problems lies with more pro-market reform, not more government control. Of course, there is no single model for national health care systems in other countries. Indeed, the differences from country to country are so great that the terms “national health care” or “universal coverage” can be misleading—as if one collective model shows how other countries deal with health care and health insurance. Each country’s system is the product of its unique conditions, history, politics, and national character. Those systems range from the managed competition approach of the Netherlands and Switzerland to the more rigid single-payer systems of Great Britain, Canada and Norway, with many variations in between. Some countries have a true single-payer system, prohibiting private insurance and even restricting the ability of patients to spend their own money on health care. Others are multi-payer systems, with private competing insurers and varying degrees of government subsidy and regulation. Some countries base their systems around employment, while others have completely divorced work from insurance. Some require consumers to share a significant portion of health care costs through either high deductibles or high copayments. Others subsidize virtually first-dollar coverage. Some allow unfettered choice of physicians. Others allow a choice of primary care physicians but require referrals for specialists. Still others restrict even the choice of primary care doctors. In fact, about the only system one cannot find is the type of system described by Michael Moore, Physicians for a National Health Program, and other national health care advocates— a system that provides unlimited care with no premiums, deductibles, or copay-ments, from the physician of one’s choice. For example, in SiCKO, Moore lambastes American insurers for denying coverage for rare and experimental treatments.327 And, during the New Hampshire primary, John Edwards ran television advertisements highlighting the tragic death of a teenage girl whose liver transplant was rejected by her father’s insurer.328 These stories play effectively on the emotions and drive a desire for change. Yet one searches in vain for a national health care system anywhere that regularly pays for experimental and untested procedures. Likewise, advocates for national health care tap into the anger many patients (and doctors) feel for the gatekeepers and prior approval required under American managed care. But many if not most foreign systems require similar gatekeepers. Moreover, copayments and other forms of cost sharing are commonplace.

It is also important to realize that no country’s system would translate directly to the United States. Americans are unlikely to accept the rationing or restrictions on care and technology that many countries use to control costs. Nor are U.S. physicians likely to accept a cut in income to the levels seen in countries like France or Germany. The politics, economics, and national cultures of other countries often vary significantly from those of the United States. Their citizens are far more likely to have faith in government actions and to be suspicious of free markets. And polling suggests that citizens of many countries put social solidarity and equality ahead of quality and choice when it comes to health policy.329 American attitudes are quite different. As pollster Bill McInturff notes, “Never, in my years of work, have I found someone who said, ‘I will reduce the quality of the health care I get, so that all Americans can get something.’”330 Even so, some important lessons can be drawn from the experiences of other countries: • Universal health insurance does not mean universal access to health care. In practice, many countries promise universal coverage but ration care or have extremely long waiting lists for treatment. Nor does a national health care system necessarily mean universal coverage. Some countries with ostensibly universal systems actually fall far short of universal coverage, and most leave at least a small remnant (1–2 percent of the population) uncovered. Although this is certainly wider coverage than the United States provides, it shows the difficulty of achieving either truly universal coverage or universal access to care. • Rising health care spending is not a uniquely American phenomenon. Other countries spend considerably less than the United States on health care, both as a percentage of GDP and per capita, often because they begin with a lower base of expenditures.Nonetheless, their costs are still rising, leading to budget deficits, tax increases, and/or benefit cuts. In 2004, the last year for which data is available, the average annual increase for per capita health spending in the countries discussed in this study was 5.55 percent, only slightly lower than the United States’ 6.21 percent. 331 As the Wall Street Journal notes, “Europeans . . . face steeper medical bills in the future in their cash-strapped governments.”332 In short, there is no free lunch. • Those countries that have single-payer systems or systems heavily weighted toward government control are the most likely to face waiting lists, rationing, restrictions on the choice of physician, and other barriers to care. Those countries with national health care systems that work better, such as France, the Netherlands, and Switzerland, are successful to the degree that they incorporate market mechanisms such as competition, cost-consciousness, market prices, and consumer choice, and eschew centralized government control. • Dissatisfaction and discontent with a nation’s health care system seems to be universal. Undoubtedly, Americans are unhappy with the current state of our health care system. According to the most recent Commonwealth Fund survey, an astounding 82 percent of Americans believe that our system either requires fundamental change or needs to be completely rebuilt.333 Not surprisingly, polls suggest health care reform is the top domestic policy issue in the upcoming presidential election.334 Yet, that same Commonwealth Fund study shows large majorities in every country, ranging from 58 percent in the Nether-lands to 78 percent in Germany calling for fundamental reform or complete rebuilding of their health care systems.335 Earlier polling by the Stockholm Network found similar levels of unhappiness.336 Not as bad as in the United States,

perhaps, but certainly no ringing endorsement of their systems. • Although no country with universal coverage is contemplating abandoning a universal system, the broad and growing trend in countries with national health care systems is to move away from centralized government control and introduce more market-oriented features. As Richard Saltman and Josep Figueras of the World Health Organization put it, “The presumption of public primacy is being reassessed.”337 Alan Jacobs of Harvard points out that despite significant differences in goals, content, and strategies, European nations are generally converging toward market practices in health care.338 Thus, even as Americans debate adopting a government-run system, countries with those systems are debating how to make their systems look more like that of the United States. Looking at other countries and their experiences, then, can provide guidance to Americans as we debate how to reform our health care system. National health care is not a monolithic idea, nor is it as disastrous as U.S. critics sometimes portray. Some national health care systems do some things well. Yet, those systems do have serious problems. In most cases, national health care systems have successfully expanded insurance coverage to the vast majority, if not quite all, of the population. But they have not solved the universal and seemingly intractable problem of rising health care costs. In many cases, attempts to control costs through governmental fiat have led to problems with access to care, either delays in receiving care or outright rationing. In wrestling with this dilemma, many countries are loosening government controls and injecting market mechanisms, particularly cost sharing by patients, market pricing of goods and services, and increased competition among insurers and providers. As Pat Cox, former president of the European Parliament, put it in a report to the European Commission, “We should start to explore the power of the market as a way of achieving much better value for money.”339 Moreover, the growth of the government share of health care spending, which had increased steadily from the end of World War II until the mid-1980s, has stopped, and in many countries the private share has begun to increase, in some cases substantially. Some evidence shows a growing shift from public to private provision of health care.340 If the trend in the United States over the last several years has been toward a more European-style system, the trend in Europe is toward a system that looks more like America’s. Therefore, if U.S. policymakers can take one lesson from national health care systems around the world, it is not to follow the road to government-run national health care, but to increase consumer incentives and control. The United States can increase coverage and access to care, improve quality, and control costs without importing the problems of national health care. In doing so, we should learn from the successes—and the failures—of systems in other countries.

Notes The author wishes to thank Pierre Bessard of the Institut Constant de Rebecque; Valentin Petkant-chin of the Institut Economique Molinari; Alberto Mingardi of the Instituto Bruno Leoni; and Regina Herzlinger of Harvard University for their assistance. The author would also like to offer special thanks to Jonathan Cohn of the New Republic and author of Sick: The Untold Story of America’s Health Care Crisis—and the People W ho Pay the Price, for his willingness to review and comment on this paper despite disagreeing with my conclusions. 1. SiCKO , Dog Eat Dog Films, 2007.

2. Paul Krugman, “ The Waiting Game,” New York Times, July 16, 2007. 3. Physicians for a National Health Program, “ Insurance CEOs Fattened on the Suffering of Many,” http://www.pnhp.org/news/2006/april/the_healthcare_tipp.php. 4. Paul Krugman and Robin Wells, “ The Health Care Crisis and What to Do about It,” New York Review of Books,March 23, 2006. 5. Organisation for Economic Co-operation and Development, “ OECD Health Data 2007: Statistics and Indicators for 30 Countries” (Paris: OECD, 2007). 6. Christine Borger et al., “ Health Spending Projections through 2015: Changes on the Horizon,” Health Affairs 25, no. 2 (2006): w61–w73, http://content.healthaffairs.org/cgi/content/abstract/hlthaff.25.w61. 7. Uwe Reinhardt of Princeton University, for example, estimates that nearly half of the difference in spending between the United States and other industrial nations is due to America’s higher GDP. Uwe Reinhardt, Peter Hussey, and Gerard Anderson, “ U.S. Health Care Spending in an International Context,” Health Affairs 23, no. 3 (2004): 11–12. 8. Kaiser Family Foundation, “ Employer Health Benefits 2007 Annual Survey,” Kaiser Family Foundation, September 11, 2007. 9. 2007 Annual Report of the Board of Trustees of the Federal Hospital Insur ance and Federal Supplemental Medical Insurance Trust Funds (Washington: Government Printing Office, 2007). 10. Jagadeesh Gokhale, “ Medicaid’s Soaring Costs: Time to Step on the Brakes,” Cato Institute Policy Analysis no. 597, July 19, 2007. 11. Carmen DeNavas-Walt et al., “ Income, Poverty and Health Insurance in the United States: 2005,” Current Population Reports (Washington: U.S. Census Bureau, 2006). This number should be approached with a great deal of caution, however. A study for the Department of Health and Human Services suggests that the Current Population Survey “ appears to overstate the uninsured substantially compared to other surveys.” Cathy Callahan and James Mays, “ Working Paper: Estimating the Number of Individuals in the United States without Health Insurance,” Actuarial Research Service, prepared for the Department of Health and Human Services (Washington: U.S. Department of Health and Human Services, 2005), p. 22. Other studies put the actual number of uninsured at 21–31 million. Congressional Budget Office, “ How Many People Lack Health Insurance and for How Long?” (Washington: Congressional Budget Office, 2003). Moreover, all those estimates include people who could obtain coverage. For example, as many as one-third of Americans without health insurance are eligible for existing government programs such as Medicaid or the State Children’s Health Insurance Programbut have failed to sign up for the program. BlueCross BlueShield Association, “ The Uninsured in America,” January 2005, www.coverageforall.org/pdf/BC-BS_Uninsured-America.pdf. Roughly another third live in households with annual incomes above $50,000, suggesting that many could reasonably afford to purchase insurance if they chose to do so. Devon Herrick, “ Crisis of the Uninsured: 2007,” National Center for Policy Analysis Brief Analysis no. 595, September 28, 2007. 12. “ Overview of the Uninsured in the United States: An Analysis of the 2005 Current Population Survey” (Washington: U.S. Department of Health and Human Services, 2005). 13. This is not to say that universal coverage should be the goal of health care reform, and certainly not the primary goal. Universal insurance coverage does not necessarily translate into access to care. And, while some evidence indicates that uninsured Americans have somewhat worse health outcomes than insured Americans, the evidence of a direct link between health insurance and health is weak. Nor is expanding insurance coverage necessarily the best or most efficient use of resources for improving health. Helen Levy and David Meltzer, “ What Do We Really Know about Whether Health Insurance Affects Health,” Economic Research Initiative on the Uninsured Working Paper no. 6, December 2001. Moreover, in many cases, expanding insurance coverage will exacerbate the problems of third-party payment. 14. Cited in Tamar Nordenberg, “ Make No Mistake: Medical Errors Can Be Serious,” FDA Consumer Magazine 34, no. 5 (2000). 15. Elizabeth McGlynn et al., “ The Quality of Health Care Delivered to Adults in the United States,” New England Journal of Medicine 348 (2003): 2635–45. 16. Rita Mangione-Smith et al., “ The Quality of Ambulatory Care Delivered to Children in the United States,” New England Journal of Medicine 357 (2007): 1515–23. 17. See, for example, http://www.michaelmoore.com/sicko/health-care-proposal/ and http://www.pnhp.org. 18. World Health Organization, “ The World Health Report 2000” (Geneva: WHO 2000); SiCKO , Dog Eat Dog Films, 2007. For a

critical look at the WHO study, see Glen Whitman, “ WHO Do You Think You’re Fooling: The World Health Organization’s Problematic Ranking of Health Care Systems,” Cato Institute Briefing Paper, February 28, 2008; Twila Brase, “ WHO’s Hidden Agenda,” Ideas on Liberty, Foundation for Economic Education, October 2000. 19. World Health Organization. 20. Ibid. 21. OECD, “ Health at a Glance: OECD Indicators, 2005” (Paris: OECD Publishing, 2005), p.11. 22. Census Bureau, 2000 Census (Washington: U.S. Census Bureau). 23. Robert L. Ohsfeldt and John E. Schneider, The Business of Health: The Role of Competition, Markets, and Regulation (Washington: American Enterprise Institute Press, 2006). 24. In Austria and Germany, fetal weight must be at least 500 grams (1 pound) to count as a live birth; in other parts of Europe, such as Switzerland, the fetus must be at least 30 centimeters (12 inches) long. In Belgiumand France, births at less than 26 weeks gestation are registered as lifeless. And some countries don’t reliably register babies who die within the first 24 hours after birth. For a full discussion of the issue, see Miranda Mugford, “ A Comparison of Reported Differences in Definitions of Vital Events and Statistics,” W orld Health Statistics Quarterly 36 (1983), cited in Nicholas Eberstadt, The Tyranny of Numbers: Measurements and Misrule (Washington: AEI Press, 1995), p. 50. Some, but not all, countries are beginning to standardize figures, and future data may be more reliable. 25. Anthony DePalma, “ SiCKO , Castro, and the 120 Year Club,” New York Times,May 27, 2007. 26. Arduino Verdecchia et al., “ Recent Cancer Survival in Europe: A 2000–02 Period Analysis of EUROCARE-4 Data,” The Lancet Oncology 8, no. 9 (2007): 784–96, http://www.thelancet.com/journals/lanonc/article/PIIS1470204507702462/abstract; Nicole Martin, “ UK Cancer Survival Rate Lowest in Europe,” Daily Telegraph , August 24, 2007. Of course, some argue that these figures are skewed by aggressive U.S. testing and diagnostic procedures. In the United States, doctors catch many cancers that would go undetected in other countries. These cancers may be small or slow growing and might not kill the person. That these cancers are diagnosed in the United States but not in other countries makes our survival rate look higher. Jonathan Cohn, “ What Jacques Chirac Could Teach Us about Health Care,” New Republic, April 10, 2007. That theory is worth considering; increased screening likely does affect the figures for slow growing cancers such as prostate cancer (the source of much controversy since Rudy Giuliani raised the issue in his campaign). “ Rudy Wrong on Cancer Survival Chances,” W ashington Post , October 31, 2007; David Gratzer, “ Rudy Is Right in Data Duel about Cancer,” Investors Business Daily, November 6, 2007. As Robert Ohsfeldt and John Schneider concede in their book, The Business of Health , “ [Many] cancer survival rate estimates . . . do not adjust for cancer stage at diagnosis. This could result in survivor time bias—those with cancers detected at an earlier stage would exhibit longer post diagnosis survival times, even for cancers that are essentially untreatable.” Robert Ohsfeldt and John Schneider, The Business of Health (Washington: AEI, 2007), pp. 23–24. However, survivor time bias is not as big an issue for cancers that have faster metastasizing times or that strike younger patients. As Ohsfeldt and Schneider go on to note: Survivor time bias, however, should not be a significant concern for cancers that respond well to treatment if detected early. For such cancers, early detection makes a substantive contribution to survival time— the longer survival time associated with early detection thus is not a spurious effect of early detection. An example is thyroid cancer. In the United States, virtually all females with thyroid cancer survive for at least five years. The lower survival rates for thyroid cancer in European countries suggest some underperformance in either early detection or post diagnosis management in these countries. In contrast, the differences in survivor rates are less pronounced for cancers that are more difficult to treat, such as lung cancers. The United States’ advantage holds for other cancers, too, including breast, colon, and thyroid cancer among others. Moreover, the benefits of early detection and treatment go well beyond survival rates. Even for prostate cancer, early treatment can significantly affect quality of life. And the United States might simply have more cases of prostate cancer than other countries. (For example, diet could play a significant role. Kyung Song, “ Study Links Diet to Prostate Cancer,” Seattle Times, October 11, 2007.) Finally, one of the most common arguments for socialized medicine is its capacity to increase screening and preventive care. Indeed, John Edwards actually wants to make testing mandatory for all Americans. “ Edwards Backs Mandatory Preventive Care,” Associated Press, September 2, 2007. 27. “ World Briefing: Berlusconi Has Heart Surgery in US,” New York Times , December 19, 2006. 28. “ Stronach Went to US for Cancer Treatments: Report,” CTV, September 14, 2007,

http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20070914/belinda_Stronach_070914/20070914. 29. Steve Findlay, “ U.S. Hospitals Attracting Patients fromAbroad,” USA Today, July 22, 1997. 30. The two principal reasons for sending a patient abroad were the lack of availability of services in Canada (40 percent) and the length of the wait for certain treatments (19 percent). Robert J. Blendon et al., “ Physicians’ Perspectives on Caring for Patients in the United States, Canada, and West Germany,” New England Journal of Medicine 328, no. 14 (1993): 1011–16. 31. John Goodman, “ Moore’s SiCKO Could Put Lives at Risk,” The Michael Moore Chronicles, National Center for Policy Analysis, 2007, http://sicko.ncpa.org/moores-sicko-could-put-lives-at-risk. 32. “ Nobel Prize in Physiology or Medicine Winners 2007–1901,” The Nobel Prize Internet Archive, http://almaz.com/nobel/medicine/medicine.html. 33. Pharmaceutical Research and Manufacturing of America, “ R&D Spending by U.S. Biopharaceutical Com-panies Reaches a Record $55.2 Billion in 2006,” February 12, 2007. 34. Economic Report of the President (Washington: Government Printing Office, 2004), p. 192. 35. Gerard Anderson et al., “ It’s the Prices Stupid: Why the United States Is So Different fromOther Countries,” Health Affairs 22, no. 3 (2003): 99. 36. Oliver Schoffski, “ Diffusion of Medicines in Europe,” paper prepared for the European Federation of Pharmaceutical Industries and Associations,” 2002, cited in Daniel Kessler, “ The Effects of Pharmaceutical Price Controls on the Cost and Quality of Medical Care: A Review of the Empirical Literature,” submitted to the U.S. International Trade Commission. 37. Ibid. 38. For example, some evidence seems to indicate that overuse of CT scans in the United States, especially in children, may actually be increasing the incidence of some cancers. David Brenner and Eric Hall, “ Computed Tomography—An Increasing Source of Radiation Exposure,” New England Journal of Medicine 357, no. 22 (2007): 2277–84. Yet, other evidence suggests that increased use of CT scans may reduce deaths fromother cancers such as lung cancer. International Early Lung Cancer Investigators, “ Survival of Patients with Stage I Lung Cancer Detected on CT Screening,” New England Journal of Medicine 355, no. 17 (2006): 1763–71. Robin Hanson of George Mason University has argued that much of U.S. health care spending provides no benefit at all. Indeed, Hanson believes that we could cut health care spending by 50 percent without affecting health outcomes. Robin Hanson, “ Cut Medicine in Half,” Cato Unbound, September 10, 2007, http://www.cato-unbound.org/2007/09/10/robin-hanson/cut-medicine-inhalf/. In contrast, Mark McClellan of Harvard University and economist David Cutler argue that the benefits of increased health care technology vastly overwhelmtheir costs. David Cutler and Mark McClellan, “ Is Technological Change in Medicine Worth It?” Health Affairs 20 (2001): 11–29. 39. Ohsfeldt and Schneider, The Business of Health . It is true, as Jonathan Cohn points out, that much, though by no means all, of the basic research on health care is funded by the National Institutes of Health. Jonathan Cohn, “ Creative Destruction: The Best Case against National Health Care,” The New Republic, November 12, 2007. However, the vast majority of applied research is funded by the private sector. Overall, roughly 57 percent of all biomedical research spending comes fromprivate industry. From1989 to 2002, four times as much money was invested in private biotechnology companies in America as in all of Europe. Tyler Cowen, “ Poor U.S. Scores in Health Care Don’t Measure Nobels or Innovation,” New York Times, October 5, 2006. 40. Cowen, “ Poor U.S. Scores in Health Care Don’t Measure Nobels or Innovation.” 41. “ The Novartis Warning,” W all Street Journal, May 8, 2002. 42. See Alain Enthoven, “ The History and Principles of Managed Competition,” Health Affairs 12, suppl. 1 (1993): 24–48. 43. Michael Tanner, “ No Miracle in Massachusetts: Why Governor Romney’s Health Care ReformWon’t Work,” Cato Institute Briefing Paper no. 97, June 6, 2006. 44. Jonathan Cohn, Sick: The Untold Story of America’s Health Care Crisis—And the People W ho Pay the Price (New York: HarperCollins, 2007), p. 226. 45. Ezra Klein, “ Health Care Wrap Up,” www.ezraklein.com, April 25, 2005; http://www.prospect.org/csnc/blogs/ezraklein_archive?month=04&year=2005&base_name=health_care_wrapup.

Introduction The World Health Report 2000, prepared by the World Health Organization, presented performance rankings of 191 nations’ health care systems. 1 Those rankings have been widely cited in public debates about health care, particularly by those interested in reforming the U.S. health care system to resemble more closely those of other countries. Michael Moore, for instance, famously stated in his film SiCKO that the United States placed only 37th in the WHO report. CNN.com, in verifying Moore’s claim, noted that France and Canada both placed in the top 10.2 Those who cite the WHO rankings typically present them as an objective measure of the relative performance of national health care systems. They are not. The WHO rankings depend crucially on a number of underlying assumptions—some of them logically incoherent, some characterized by substantial uncertainty, and some rooted in ideological beliefs and values that not everyone shares. Changes in those underlying assumptions can radically alter the rankings.

More Than One WHO Ranking The first thing to realize about the WHO health care ranking system is that there is more than one. One ranking claims to measure “overall attainment” (OA) while another claims to measure “overall performance” (OP). These two indices are constructed from the same underlying data, but the OP index is adjusted to reflect a country’s performance relative to how well it theoretically could have performed (more about that adjustment later). When using the WHO rankings, one should specify which ranking is being used: OA or OP. Many popular reports, however, do not specify the ranking used and some appear to have drawn from both. CNN.com, for example, reported that both Canada and France rank in the top 10, while the United States ranks 37th. There is no ranking for which both claims are true. Using OP, the United States

does rank 37th. But while France is number 1 on OP, Canada is 30. Using OA, the United States ranks 15th, while France and Canada rank 6th and 7th, respectively. In neither ranking is the United States at 37 while both France and Canada are in the top 10. Which ranking is preferable? WHO presents the OP ranking as its bottom line on health system performance, on the grounds that OP represents the efficiency of each country’s health system. But for reasons to be discussed below, the OP ranking is even more misleading than the OA ranking. This paper focuses mainly on the OA ranking; however, the main objections apply to both OP and OA.

Factors for Measuring the Quality of Health Care The WHO health care rankings result from an index of health-related statistics. As with any index, it is important to consider how it was constructed, as the construction affects the results. WHO’s index is based on five factors, weighted as follows:3 1. Health Level: 25 percent 2. Health Distribution: 25 percent 3. Responsiveness: 12.5 percent 4. Responsiveness Distribution: 12.5 percent 5. Financial Fairness: 25 percent The first and third factors have reasonably good justifications for inclusion in the index: Health Level. This factor can most justifiably be included because it is measured by a country’s disability-adjusted life expectancy (DALE). Of course, life expectancy can be affected by a wide variety of factors other than the health care system, such as poverty, geography, homicide rate, typical diet, tobacco use, and so on. Still, DALE is at least a direct measure of the health of a country’s residents, so its inclusion makes sense. Responsiveness. This factor measures a variety of health care system features, including speed of service, protection of privacy, choice of doctors, and quality of amenities (e.g., clean hospital bed linens). Although those features may not directly contribute to longer life expectancy, people do consider them aspects of the quality of health care services, so there is a strong case for including them. The other three factors, however, are problematic: Financial Fairness. A health system’s financial fairness (FF) is measured by determining a household’s contribution to health expenditure as a percentage of household income (beyond subsistence), then looking at the dispersion of this percentage over all households. The wider the dispersion in the percentage of household income spent on health care, the worse a nation will perform on the FF factor and the overall index (other things being equal). In the aggregate, poor people spend a larger percentage of income on health care than do the rich.4 Insofar as health care is regarded as a necessity, people can be expected to spend a decreasing fraction of their income on health care as their income increases. The same would be true of food, except that the rich tend to buy higher-quality food.

The FF factor is not an objective measure of health attainment, but rather reflects a value judgment that rich people should pay more for health care, even if they consume the same amount. This is a value judgment not applied to most other goods, even those regarded as necessities such as food and housing. Most people understand and accept that the poor will tend to spend a larger percentage of their income on these items. More importantly, the FF factor, which accounts for one-fourth of each nation’s OA score, necessarily makes countries that rely on market incentives look inferior. The FF measure rewards nations that finance health care according to ability to pay, rather than according to actual consumption or willingness to pay. In most countries, a household’s tax burden is proportional to income, or progressive (i.e., taxes consume an increasing share of income as income rises). Thus, a nation’s FF score rises when the government shoulders more of the health spending burden, because more of the nation’s medical expenditures are financed according to ability to pay. In the extreme, if the government pays for all health care, then the distribution of the health-spending burden is exactly the same as the distribution of the tax burden. To use the existing WHO rankings to justify more government involvement in health care —such as via a single-payer health care system—is therefore to engage in circular reasoning because the rankings are designed in a manner that favors greater government involvement. If the WHO rankings are to be used to determine whether more government involvement in health care promotes better health outcomes, the FF factor should be excluded. The ostensible reason for including FF in the health care performance index is to consider the possibility of people landing in dire financial straits because of their health needs. It is debatable whether the potential for destitution deserves inclusion in a strict measure of health performance per se. But even if it does, the FF factor does not actually measure exposure to risk of impoverishment. FF is calculated by (1) finding each household’s contribution to health expenditure as a percentage of household income (beyond subsistence), (2) cubing the difference between that percentage and the corresponding percentage for the average household, and (3) taking the sum of all such cubed differences.5 Consequently, the FF factor penalizes a country for each household that spends a larger-than-average percentage of its income on health care. But it also penalizes a country for each household that spends a smaller-than-average percentage of its income on health care. Put more simply, the FF penalizes a country because some households are especially likely to become impoverished from health costs—but it also penalizes a country because some households are especially unlikely to become impoverished from health costs. In short, the FF factor can cause a country’s rank to suffer because of desirable outcomes. Health Distribution and Responsiveness Distribution. These two factors measure inequality in the other factors. Health Distribution measures inequality in health level6 within a country, while Responsiveness Distribution measures inequality in health responsiveness within a country. Strictly speaking, neither of these factors measures health care performance, because inequality is distinct from quality of care. It is entirely possible to have a health care system characterized by both extensive inequality and good care for everyone. Suppose, for instance, that Country A has health responsiveness that is “excellent” for most citizens but merely “good” for some disadvantaged groups, while Country B has responsiveness that is uniformly “poor” for everyone. Country B would score higher than Country A in terms of responsiveness distribution, despite Country A having better responsiveness than Country B for even its worst-off citizens. The same point applies to the distribution of health level.

To put it another way, suppose that a country currently provides everyone the same quality of health care. And then suppose the quality of health care improves for half of the population, while remaining the same (not getting any worse) for the other half. This should be regarded as an unambiguous improvement: some people become better off, and no one is worse off. But in the WHO index, the effect is ambiguous. An improvement in average life expectancy would have a positive effect, while the increase in inequality would have a negative effect. In principle, the net effect could go either way. There is good reason to account for the quality of care received by a country’s worst-off or poorest citizens. Yet the Health Distribution and Responsiveness Distribution factors do not do that. Instead, they measure relative differences in quality, without regard to the absolute level of quality. To account for the quality of care received by the worst-off, the index could include a factor that measures health among the poor, or a health care system’s responsiveness to the poor. This would, in essence, give greater weight to the well-being of the worst off. Alternatively, a separate health performance index could be constructed for poor households or members of disadvantaged minorities. These approaches would surely have problems of their own, but they would at least be focused on the absolute level of health care quality, which should be the paramount concern.

Uncertainty and Sensitivity Intervals The WHO rankings are based on statistics constructed in part from random samples. As a result, each rank has a margin of error. Media reports on the rankings routinely neglect to mention the margins of error, but the study behind the WHO ranking7 admirably includes an 80-percent uncertainty interval for each country. These intervals reveal a high degree of uncertainty associated with the ranking method. Using the OA ranking, the U.S. rank could range anywhere from7 to 24. By comparison, France could range from 3 to 11 and Canada from 4 to 14. The considerable overlap among these intervals, as shown in Figure 1, means one cannot say with great confidence that the United States does not do better in the OA ranking than France, Canada, and most other countries. These intervals result only from errors associated with random sampling. They do not take into account differences that could result from different weightings of the five component factors discussed earlier. Given that discussion, the proper weight for three of these factors is arguably zero. The authors of the study did not calculate rankings on the basis of that weighting, but they did consider other possible factor weights to arrive at a sensitivity interval for each country’s rank. It turns out that the U.S. rank is unusually sensitive to the choice of factor weights, as shown in Figure 2. The U.S. rank could range anywhere from 8 to 22, while Canada could range from 7 to 8 and France from 6 to 7.8 These intervals depend on the range of weights considered and would therefore be larger if more factor weights were considered. Figure 1 Uncertainty Intervals of OA-Based Ranks

Furthermore, the rank resulting from any given factor weighting will itself have a margin of error resulting from random sampling. That means the two different sorts of intervals (uncertainty and sensitivity) ought to be considered jointly, resulting in even wider ranking intervals. The ranks as reported in the media, without corresponding intervals, grossly overstate the precision of the WHO study.

Achievement versus Performance Ranking As noted earlier, the WHO report includes rankings based on two indices, OA and OP. The OP index, under which the U.S. rank is notably worse, is the WHO’s preferred measure. It is worth considering the process that is used to convert the OA index into the OP index.9 The purpose of the OA-to-OP conversion is to measure the efficiency of health care systems— that is, their ability to get desirable health outcomes relative to the level of expenditure or resources used. That is a sensible goal. The results of the OP ranking, however, are easily misinterpreted, or misrepresented, as simply measuring health outcomes irrespective of inputs. For instance, according to the WHO press release that accompanied the original report, “The U.S. health system spends a higher portion of its gross domestic product than any other country but ranks 37 out of 191 countries according to its performance, the report finds.”10 The implication is that the United States performs badly in the OP ranking despite its high expenditures—an implication that has also been drawn by various media

outlets and commentators.11 A more accurate statement would be that the United States performs badly in the ranking because of its high expenditures, at least in part. Figure 2 Sensitivity Intervals for OA-Based Ranks

When Costa Rica ranks higher than the United States in the OP ranking (36 versus 37), that does not mean Costa Ricans get better health care than Americans. Americans most likely get better health care— just not as much better as could be expected given how much more America spends. If the question is health outcomes alone, without reference to how much has been spent, the more appropriate measure is the OA ranking, where the United States is 15 and Costa Rica is 45. (Even then, this paper’s earlier criticisms of the OA ranking still apply.) The conversion of OA into OP depends on two constructed variables: first, the maximum level of performance a country could potentially achieve; and second, the minimumlevel of performance the country could achieve without a modern health care system. The maximum is estimated on the basis of a country’s per capita health expenditure and its level of literacy. The minimum is based on literacy alone. Literacy is used as a proxy for all aspects of a country that might affect health other than the health care system. Many other variables could have been used to estimate a country’s minimum and maximum possible performance, such as average income, crime rate, geography, nutrition, and so on. None of these were included. But Dean Jamison and Martin Sandbu, in a 2001 Science article,12 reconstructed the OP ranking while including just one additional variable: geography. 13 For 79 out of 96 countries for which Jamison and Sandbu were able to recalculate ranks,14 the resulting rank fell outside—often far outside—the WHO

report’s 80-percent uncertainty intervals for those ranks. In other words, inclusion of just one additional variable could drastically affect the resulting ranks. Inclusion of other variables could result in even greater deviations from the reported ranks. For this reason, the OP ranking is even more misleading than the OA ranking, which simply reports health outcomes without a spurious “efficiency” adjustment.

Underlying Paternalistic Assumptions The WHO rankings, by purporting to measure the efficacy of health care systems, implicitly take all differences in health outcomes not explained by spending or literacy and attribute them entirely to health care system performance. Nothing else, from tobacco use to nutrition to sheer luck, is taken into account. To some extent, the exclusion of other variables is simply the result of inadequacies in the data. It is difficult to get information on all relevant factors, and even more difficult to account for their expected effects on health. But some factors are deliberately excluded by the WHO analysis on the basis of paternalistic assumptions about the proper role of health systems. An earlier paper laying out the WHO methodological framework asserts, “Problems such as tobacco consumption, diet, and unsafe sexual activity must be included in an assessment of health system performance.”15 In other words, the WHO approach holds health systems responsible not just for treating lung cancer, but for preventing smoking in the first place; not just for treating heart disease, but for getting people to exercise and lay off the fatty foods. That approach is problematic for two primary reasons. First, it does not adequately account for factors that are simply beyond the control of a health system. If the culture has a predilection for unhealthy foods, there may be little health care providers can do about it. Conversely, if the culture has a preexisting preference for healthy foods, the health care system hardly deserves the credit. (Notice the high rank of Japan, known for its healthy national diet.) And it hardly makes sense to hold the health system accountable for the homicide rate. Is it reasonable to consider the police force a branch of the health system? Second, the WHO approach fails to consider people’s willingness to trade off health against other values. Some people are happy to give up a few potential months or even years of life in exchange for the pleasures of smoking, eating, having sex, playing sports, and so on. The WHO approach, rather than taking the public’s preferences as given, deems some preferences better than others (and then praises or blames the health system for them). A superior (though still imperfect) approach would take people’s health-related behavior as given, and then ask which health systems do the best job of dealing with whatever health conditions arise. We could ask, for instance, which systems do the best job of treating cancer or heart disease patients. We could then rank nations according to disease-specific mortality rates or five-year survival rates. These approaches present challenges as well, as it can be difficult to control for all confounding factors. For example, better five-year survival rates may reflect earlier detection rather than better treatment or outcomes. Still, if the goal is to assess the efficacy of countries’ health care systems, it makes more sense to look at condition-specific success rates than indices (like the OA and OP) that fail to control for non– health-care factors like nutrition and lifestyle.

Conclusion The analysts behind the WHO rankings express the hope that their framework “will lay the basis for a shift from ideological dis- course on health policy to a more empirical one.”16 Yet the WHO rankings themselves have a strong ideological component. They include factors that are arguably unrelated to actual health performance and some that could even improve in response to worse health performance. Even setting those concerns aside, the rankings are still highly sensitive to both measurement error and assumptions about the relative importance of the components. And finally, the WHO rankings reflect implicit value judgments and lifestyle preferences that differ among individuals and across countries. The WHO health care ranking system does not escape ideology. On the contrary, it advances ideological assumptions under the guise of objectivity. Those interested in objective measures of health system performance should look elsewhere.

Quoting Dan Pelino, IBM’s general manager for health care and life sciences: “ You would think that, given the fact that we’re willing to spend four trillion . . . we would have the highest quality and we would have the best safety for health care delivery. . . . And then the World Health Organization ranks the U.S. 37th overall in health systemperformance.” 12. Dean T. Jamison and Martin E. Sandbu, “ WHO Ranking of Health SystemPerformance,” Science 293 (August 31, 2001): 1595– 96. 13. Geography may affect health because of climate effects. Jamison and Sandbu note that living in a tropical location appears to be associated with worse health outcomes (p. 1596). 14. Jamison and Sandbu were unable to obtain the data necessary to duplicate the WHO’s analysis for all 191 countries. 15. Christopher J. L. Murray and Julio Frenk, “ A Framework for Assessing the Performance of Health Systems,” Bulletin of the W orld Health Organization 78, no. 6 (2000): 717–31, 727, http://www.who.int/docstore/bulletin/pdf/2000/issue6/bu0542.pdf. 16. Ibid., p. 728.

Introduction The debate over how to reform America’s health care sector often involves comparisons between the United States and other countries, and with good reason. Looking at other countries can help us learn which policies, if any, to emulate, and which to avoid. There have been many attempts at international health care system comparisons. Among the most influential are the World Health Report 2000 published by the World Health Organization, 1 several studies published by the Commonwealth Fund,2 and individual measures such as infant mortality and “mortality amenable to health care.”3 Generally in these studies, the United States performs poorly in comparison to Europe, Australia, and Japan. Therefore, scholars often use the studies to argue for adding even more government regulations to our already highly regulated health care system.4 However, these studies suffer from several problems. First, they often rely on unadjusted aggregate data—such as life expectancy, or mortality from heart disease—that can be affected by many non–health care factors, including nutrition, exercise, and even crime rates. Second, they often use process measures, such as how many patients have received a pap smear or mammogram in the past three years. Process measures tell us what doctors do, but provide only an indirect measure of doctors’ productivity. Third, some of these studies inappropriately incorporate their own biases about financing in their statistics, which makes market-driven health systems appear worse even if their outcomes are similar or better.5, 6 An additional limitation of these studies is the omission of any measure of innovation. None of the best-known studies factor in the contribution of various countries to the advances that have come to characterize the current practice of health care in the developed world. Every single health care test or treatment must be invented at some point. We would be living in a different world today were it not for the remarkable genius and hard work of health care inventors in the past, as well as investments from government health agencies and pharmaceutical and medical device companies. The health care issues commonly considered most important today—controlling costs and covering the uninsured— arguably should be regarded as secondary to innovation, inasmuch as a treatment must first be invented before its costs can be reduced and its use extended to everyone. But shouldn’t innovation show up in other health care measures? If the United States is making the most headway in creating cancer medications, for instance, then shouldn’t cancer care be better in the

United States? Not necessarily. Most innovations are created by only a few people, but once created they can generally be used all over the world. For example, the bulk of the development of balloon angioplasty was done by a handful of physicians— most notably Andreas Greutzig in Switzerland, with some help from U.S. physicians. Once developed, however, this procedure was used well beyond these two countries to improve the care of patients with heart attacks. Similarly, the work of Michael Brown and Joseph Goldstein at the University of Texas Southwestern Medical Center was essential to the development of the cholesterol drugs called statins, which have helped to reduce deaths from strokes and heart attacks all over the world.7 Therefore, measuring health care costs and health outcomes across countries is not sufficient. The costs of medical innovation typically appear only in the innovating nation’s health expenditures, but the health improvements that those innovations generate improve the health-outcomes statistics of many countries. Consider, for example, the frequent claim that European health systems achieve similar health outcomes to those of the United States at a much lower cost. That claim fails to consider that higher U.S. spending levels could be generating innovations that improve health outcomes in Europe and around the world. If we care about progress, we should include innovation as a separate measure, so that policymakers can adequately factor innovation into discussions of health care reform.

How to Measure Innovation Two properties of innovations make them difficult to measure. The first is that not all advances are equal; some require more ingenuity than others. Take two similar drugs— captopril and enalapril—both of which are useful for treating high blood pressure and heart failure. Captopril was the first of its kind, developed at a time when no one—including the physicians and scientists working on it—knew whether such a drug was even possible. The development of enalapril, on the other hand, although an achievement in and of itself, was greatly assisted by the knowledge that captopril had been developed first and was effective.8 Therefore, we cannot do justice to innovation by using simple output metrics such as the number of new drugs that are developed each year. The second important property of innovation is that new ideas and products are often unpopular or controversial when they are first developed. A particularly well-known example is the discovery that the bacterium Helicobacter pylori causes stomach ulcers, a finding the medical community initially resisted. And there are other examples, such as laparoscopic surgery and CT scanning, both of which were regarded with skepticism at first. This does not necessarily reflect negatively upon health care practitioners; it is important to expose new ideas to a high standard before they are widely used. However, this property makes it very difficult to measure new innovations (e.g., a new drug or specialty hospitals), because there is controversy over which of them will turn out to be effective. Therefore, we conclude that innovation is best measured by looking at advances that have withstood the test of time and are widely regarded as having had important positive effects on health care. This means, unfortunately, that many important innovations will have to be left out because they are not considered the cream of the crop or have been developed too recently, but we believe this method is most likely to yield a meaningful measure of innovation. Our basic approach in this paper is to identify significant innovations in the field of health care, and then to identify who pioneered them and where. This approach is susceptible to some valid objections.

The first objection is that, like life expectancy and infant mortality, a variety of factors other than health care policy may affect innovation. The patent system, the tax code, the general business climate, the quality of universities, and other country characteristics can affect the amount and variety of innovation. The second objection is that, even if we restrict our attention to the impact of health policies, innovation in one country can be affected by the policy choices of other countries. For instance, pharmaceutical companies in other countries might invest in new drugs with the expectation of marketing them in the United States, and U.S. pharmaceutical companies might invest in new drugs with the expectation of marketing them abroad. In this regard, it may prove difficult to isolate the effects of any given country’s policies on innovation. Nevertheless, we suspect the amount of innovation that comes out of a given country does reflect something real about its health care structure, including the amount of investment in new ideas, the willingness to accept novelty, and the talent that the country’s health care sector attracts. We consider it important to acknowledge the critical role of innovation in the health care debate, and therefore also important to make an effort to isolate the contributions of various countries. We offer the statistics in this paper with the hope that they will stimulate discussion. We do not claim that cross-country differences in innovation are solely attributable to differences in health care policies, but we do think health care policy is an important part of the story. Figure 1 Nobel Prize in Medicine and Physiology Recipients by Country of Residence, 1969–2008

Sources: Nobel Prize Internet Archive, CIA W orld Factbook. Two recipients are listed as being fromboth the United States and another country.

Types of Innovation An innovation is any new way of doing or understanding something, and it is particularly important

when it is an improvement over previous ways. Most health care innovations fall within one of the following categories. Basic Medical Sciences. These are advances in our understanding of the human body and of diseases —what doctors call “pathophysiolo-gy.” One example is the discovery that the human immunodeficiency virus (HIV) causes the disease AIDS. Di agnostics. These are advances that help us determine what disease an individual has or what has gone wrong with his or her body. They often take the form of either a device or a test. For example, CT scanners can help us discover whether someone has cancer, and certain blood tests help us determine whether someone has had a heart attack. Therapeutics. These are advances that help to treat someone with a disease. They often take the form of drugs, devices, or procedures. Two recent examples are anti-depressants, such as Prozac, and laparoscopy, which makes many surgeries safer and less invasive. Business Models. These are advances in the way that health care is organized and delivered. They can take many forms. A recent example is nurse practitioner–staffed retail clinics, which allow patients to receive care for certain common complaints at a lower cost and greater convenience than at many doctors’ offices.9, 10, 11

Innovation in Basic Medical Sciences Of the four classes of innovations, advances in the understanding of the body and of disease are typically the furthest removed from direct benefit to patients. It is rare that a scientific breakthrough provides a new therapy for patients without further advances. However, basic science discoveries often provide the basis for other advances in health care and can be among the greatest gifts to human life. One way to measure the “cream of the crop” in contributions to basic medical science is to count the number of Nobel prizes in medicine and physiology. This award is international in scope, so it is presumably not biased for or against any particular country. A large number of Nobel prizes have been awarded to American scientists in recent history. Of the 95 recipients in the past 40 years, 57 (60 percent) were from the United States, while 40 (42 percent) were from the European Union countries, Switzerland, Canada, Japan, or Australia—countries whose combined population is more than double that of the United States.12 (See Figure 1. Two recipients are listed as both from the United States and another country.) In 33 of those 40 years, at least one scientist from the United States received the award, while in only 25 of those years was there at least one non-American recipient.13 Why are Americans disproportionately represented among Nobelists in the field of medicine? Presumably the United States provides an environment that encourages basic medical research. One major contributor is the great investment in basic science research in the United States relative to other countries. Much, but not all, of that funding comes from the National Institutes of Health, which has a current annual budget of over $30 billion, as compared to its counterparts in Europe, which spend $3–$4 billion in total. Private-sector contributions also matter, and there is some indication that U.S. spending in this category is also higher, though reliable figures are not available.14, 15 There are likely to be other contributing factors as well. Thomas Boehm, a scientist who has worked in

Boston, Vienna, and Berlin, argues that the research environment in the United States is not only wealthier, but also more meritocratic, more supportive of risky new ideas, and more tolerant of waste, which is often a necessary component of progress. He argues that these factors explain the large number of European-born scientific researchers in the United States (about 400,000).16 Figure 2 Top Medical Innovations by Country of Origin, 1975–2000

Note: More than one country shares credit for some innovations.

Innovation in Diagnostics and Therapeutics A well-known and widely cited list of top medical diagnostic and therapeutic innovations was published in a paper in 2001 by Victor Fuchs, economics professor at Stanford, and Harold Sox, professor of medicine at Dartmouth. The authors searched through the two top medical journals—the New England Journal of Medicine and the Journal of the American Medical Association—and picked out the 30 innovations that were most frequently the principal focus of a published study over the previous 25 years (i.e., since 1975). They then surveyed 225 leading primary care physicians about the effects of these innovations on patients, and used the responses to rank the 30 innovations by importance. The list, in rank order, is in Table 1. Though this list is not necessarily and unambiguously the top 30 innovations since 1975, we are convinced that it cannot be too far off the mark. Each item on the list has transformed, or at least significantly contributed to, the care of at least one disease. Though surveyed physicians were invited to recommend additions, only 2 percent of respondents did so, and no specific addition was recommended

by more than one physician.17 We looked into the history of each of these innovations to find out where and when most of the significant work that led to its invention was done. Specifically, we looked for where the product was first developed to the point that it could be used on patients, and where the scientific advances that were crucial to its development were made. In the case of drug classes, we focused on the first drug developed in each class. For those innovations with particularly long and complex histories, we tried our best to focus on the most significant advances in recent history (approximately 1970s to the present). For example, in studying the history of mammography, we found that it was developed through the work of many scientists, engineers, and physicians over the course of a century. However, historians divide its development into three periods, the most recent of which is the 1970s to the present; therefore, we focused on that period.18 Of the list of 30 innovations, at least one country is listed for all but two,19 and all but one have been advanced significantly in the last 40 years.20 Of the remaining 27 innovations, work performed in the United States significantly contributed to the invention or advancement of 20, including nine of the top 10. These numbers are greater than those for any other country. In comparison, the European Union plus Switzerland, whose combined population is more than 50 percent larger than that of the United States,21 contributed significantly to 14 total innovations, including five of the top 10 (see Figure 2).22, 23 Pharmaceuticals A second list of top innovations has also been developed—this time of drugs only. Massachusetts Institute of Technology economists Iain Cockburn and Rebecca Henderson constructed a list of 21 “impact drugs,” those that had the most impact on therapeutic practice between 1965 and 1992.24 More recently, three economists working with the Manhattan Institute—Joseph DiMasi, Christopher-Paul Milne, and Benjamin Zycher—updated this list by merging it with the 25 brand-name drugs most prescribed in the United States in 2007.25 The result is a list of 37 drug classes. Seventeen of these classes are also included in the top 30 innovations in Table 1, while 20 are new. For each of the 37 drug classes, we chose one or more representative drugs. In most cases, we chose the first developed or marketed version as the sole representative drug, because the first drug of each class is usually the most difficult to develop. However, for four of the classes, we chose two drugs because of one of the following reasons: • The first to be developed differed from the one listed in the Cockburn and Hen-derson paper as having the widest impact on patient care.26 Figure 3 Top 29 Pharmaceutical Innovations by Country of Origin, 1968–2007

Note: More than one country shares credit for some innovations.

• There were two separate innovative drugs in the same class that were developed independently and reached the market at about the same time.27 Additionally, in the case of interferons, no representative was chosen because the technology to produce several of them was developed at the same time. We then looked into the history of the development of these drugs, this time focusing on which companies or laboratories were able to synthesize them and bring them to market. We excluded eight of the 37 drug classes because they received initial FDA approval more than 40 years ago.28 The results for the remaining 29 classes are in Table 2. As the table makes clear, the U.S. contribution has been significant. Sixteen of the 29 representative drug classes were developed in the United States, while 15 were developed in the E.U. or Switzerland.29 (See Figure 3. We credit two of the 29 drug classes to both the United States and a European country.) Again, all of these figures should be interpreted in light of America’s notably smaller population.30 Although we have focused on the most significant pharmaceutical innovations, similar results seem to hold for new drugs in general. In a 2006 article, economists Henry G. Gra-bowski and Y. Richard Wang compiled a list of all drugs introduced to the world market between 1982 and 2003 and divided them by country of origin. Although European firms introduced a greater total number of new drugs to the global market than American firms did, they introduced a similar number of new drugs relative to population. With respect to first-in-class drugs (which are, in general, more innovative), American firms produced a greater number than European firms, despite Europe’s larger population. The difference between American and European performance was more pronounced during the latter half of the time period.31 Only time will tell which of these drugs will prove most beneficial to patients, but these data provide at least preliminary evidence that American firms continue to contribute significantly to the development of innovative pharmaceuticals.

Explaining America’s Leading Role Why is the United States over-represented in the development of new diagnostics and therapeutics? What factors encourage innovation in these areas? Perhaps a part of it is the quality of the innovators. But this answer is unsatisfying, for it only leads to more questions: Why does the United States attract high-quality innovators? And what environmental factors allow innovators in the United States to be so productive? Although many factors are surely relevant, one likely contributor is differences in monetary compensation. Other things being equal, individuals and firms will tend to invest more in medical innovation when (a) they expect a larger return; (b) the returns will last for a longer period of time; and (c) the returns arrive sooner rather than later. There is little doubt that the United States is responsible for a disproportionate share of the monetary returns to medical innovation. In recent years, the United States has accounted for 45 percent of worldwide pharmaceutical sales, as compared to Europe’s 27–31 percent and Japan’s 9–12 percent.32, 33 The population of Europe is 150 percent that of the United States, and Japan 42 percent, so the greater contribution of the United States cannot be attributed to its large population. The fact is that Americans spend more per capita on pharmaceuticals. Critics often describe this as a defect of the American system —but with regard to encouraging innovation, we must consider it a feature. The United States is also over-represented as a base of operations for top pharmaceutical firms. Of the top 15 pharmaceutical firms by pharmaceutical revenues, eight are based in the United States, six in Europe, and one in Japan.34 The list of top pharmaceutical companies by total revenues is even more skewed: seven of the top 12 are based in the United States and five in Europe.35 This is unlikely to be a coincidence. Although the firms might have located in the United States for historical reasons or because of a superior business climate, being near their most important market is at least a contributing factor. Americans pay more for pharmaceuticals because of the nature of our health care system. Single-payer and other centrally organized health care systems, like those in much of Europe, are characterized by a great deal of monopsony (buyer) power that pushes down compensation. Prices for prescription drugs in Europe are 35 percent to 55 percent lower than in the United States.36 In addition to pushing down prices, centrally organized health care systems also limit the use of new drugs, technologies, and procedures. Those systems “control costs by upstream limits on physician supply and specialization, technology diffusion, capital expenditures, hospital budgets, and professional fees.”37 The result is that those countries use new innovations less extensively than the United States. To take just one example, a cross-national comparison of heart attack care from 1989 to 1998 found that the United States experienced both faster adoption and more rapid diffusion of new heart treatments (including cardiac catheterization, coronary artery bypass graft, and primary angioplasty) than other developed countries. Japan displayed a similar but less pronounced tendency to adopt early and expand use quickly. A number of other countries, including Canada, Australia, Belgium, Italy, Singapore, Taiwan, and possibly France, experienced late adoption but relatively fast growth in treatment rates thereafter. Those countries with the strictest supply-based restrictions on health care, most notably the United Kingdom and the Nordic countries, experienced both late adoption and slow growth in treatment rates.38 The greater openness of the U.S. system to the adoption of new technologies and treatments is also evidenced by its having twice as many MRI scanners per capita as most other developed nations, and

having three times as many cardiac surgery units and catheteriza-tion labs in the 1990s.39 Overuse? Is all the U.S. spending on new diagnostics and treatments worth it? Medical innovations definitely have aggregate benefits that outweigh their aggregate costs. Yet there is also good reason to believe they are overused in the United States. While the average benefits of the innovations may be quite high, the marginal benefit of extending their use to more and more patients could be quite low. 40 So in a static sense, the U.S. health care sector might be regarded as inefficient. In a dynamic sense, however, the story is different. Americans’ rapid and extensive use of new medical innovations creates a much higher expected monetary return, thereby subsidizing the development of new technologies. And the rest of the world gets an even better deal, since they can take advantage of the new technologies later and at lower cost. In effect, Americans contribute disproportionately to the production of a public good, while other nations take a relatively free ride.

Business-Model Innovations Business-model innovations are improvements in the way medicine is organized or delivered, in an attempt to improve its quality, reduce its cost, or both. Some examples are the development of outpatient dialysis in the 1960s, the integrated system of care developed by Kaiser Permanente, and more recently, the emergence of nurse practitioner– staffed clinics. This type of innovation is not unique to for-profit enterprises, so it should be a concern for all types of health systems, from market-based systems to single-payer systems. In fact, some of the changes that the left-leaning Commonwealth Fund recommends for health care, such as increased use of electronic medical records and changes to improve coordination of care, fall into this category. In most industries, business models change over time, especially in tandem with new technologies. Yet, unlike the innovation types discussed above, there is no list of major recent business-model innovations that have transformed health care. In fact, most medical care today in developed countries is delivered through the same two business models that were dominant a century ago: general hospitals and physician practices.41 If health care were a competitive market, we might conclude from the continued dominance of general hospitals and physician practices that they are highly efficient at meeting the needs of consumers. However, there are substantial barriers to competition in health care, so we cannot assume existing models are efficient. Moreover, there is evidence that the dominant business models are not particularly efficient. Recent studies have documented a more than three-fold difference in health spending across regions within the United States, without any corresponding difference in quality, indicating that health care can be delivered more efficiently in at least some of these regions.42, 43 The rise in health costs has led to a growing phenomenon of “medical tourism”—Americans and citizens of other developed countries traveling abroad, often to undeveloped countries, to obtain similar quality health care at a lower cost than is available at home.44, 45 Several scholars have recently argued that the dominant business models in health care contribute to

our high costs and poor coordination of services, and that new models are necessary to reduce costs and increase value.46, 47, 48 Harvard Business School professor Regina Herzlinger, for example, argues for the value of specialty hospitals and other “focused factories.” However, such progress has been slow. Although some consider the growth in specialty hospitals to be significant, a study by the General Accounting Office in 2003 found a total of only 78 specialty hospitals, compared with 4,908 general hospitals.49 Even for those who do not agree with the specifics of Herzlinger’s ideas, the lack of business-model innovation in health care should be cause for concern. Some new business models that promise to deliver higher-quality care at a lower cost have emerged. Nurse practitioner– staffed clinics are an example. But these models have barely gotten off the ground. The combination of these factors make us question whether general hospitals and individual physician practices—which evolved a century ago when medicine was very different from what it is today—continue to be ideal for modern health care. Given the lack of progress in this area across most developed nations, it would not be particularly worthwhile to compare countries. Instead, we would like to reflect on some of the many factors that have hindered the growth of new business models in health care. Resistance to Entrepreneurship Entrepreneurial physicians and others who develop and implement new models are often opposed by their peers and the government. For example, despite a lack of evidence that physician-owned specialty hospitals offer inferior care, and even some evidence that their care is better than general hospitals, general hospitals and other groups have lobbied for regulatory roadblocks to impede specialty hospitals. Congress has repeatedly enacted temporary moratoria on Medicare payments to specialty hospitals, which severely limits their growth.50 The health care reforms currently under consideration in Congress may further limit the growth of specialty hospitals.51 Payment Systems Business models are not sustainable if they lose money, which means that new business models can only work if some payer is willing to recognize their virtues and pay for them. Unfortunately, the dominant health care purchasers—Medicare, Medicaid, and the private insurers who follow Medicare’s fee schedule (which all have interests that are not necessarily aligned with their patients’ interests)— resist paying for new business models. In the words of Clayton Christensen, professor at Harvard Business School: Caregivers who do things the way they’ve always been done, or who make improvements within the present architecture of care, can get paid for what they do. Those who wish to disrupt the system by changing the very architecture of care, however, often are stymied by the specter that there literally is no money to be made from doing it.52 This system even discourages improvements and traps care in high-cost business models because its fees are based on the cost rather than the value of care. A good example is dialysis treatment for end-stage kidney disease. We now have the technology for patients to get this treatment at home—rather than at a dialysis center—at significantly lower cost and in a manner that better matches human physiology. Yet, despite improvements in this technology, home hemodialysis is becoming less frequent. One of the major

reasons is that we have a single-payer system for dialysis that rewards physicians for recommending high-cost dialysis centers rather than their cheaper alternative.53, 54, 55, 56, 57 Medical Licensing New business models, especially those that seek to reduce cost, may need to rely on midlevel clinicians such as nurse practitioners to perform services usually performed by primary care physicians, and to rely on primary care physicians to do what is usually done by specialists. This type of pattern is one that Christensen found in a wide variety of industries: “Many of the most powerful innovations that disrupted other industries did so by enabling a larger population of less skilled people to do in a more convenient, less expensive setting things that historically could be performed only by expensive specialists in centralized, inconvenient locations.”58 Yet medical licensing is an obstacle to such progress because it allows groups of physicians and other clinicians to determine what tasks their competitors may perform. For example, despite the lack of any data showing worse outcomes when patients are treated by nurse practitioners rather than physicians, a majority of states still prohibit nurse practitioners from practicing independently.59

Conclusion The health care debate should address more than just covering the uninsured and controlling costs. It should also consider whether proposed policies will promote or hinder the ability of creative individuals to innovate. For example, proposals that increase spending on diagnostics and therapeutics could encourage such innovation. On the other hand, imposing price controls on pharmaceuticals and health insurance would tend to reduce innovation.60 Experience with Medicare demonstrates that expanding government’s role as purchaser of health care services, either by expanding existing government programs or creating new programs, would tend to reduce innovation in health care delivery.61 Experience with the nascent reforms in Massachusetts suggests that enabling government to specify the terms of private health insurance contracts also tends to reduce innovation in health care delivery.62 In 2007, former Clinton administration labor secretary Robert Reich captured the potential for health care reform to influence medical innovation when he candidly told an audience that “us[ing] the bargaining leverage of the federal government in terms of Medicare, Medicaid . . . to force drug companies and insurance companies and medical suppliers to reduce their costs . . . means less innovation, and that means less new products and less new drugs on the market, which means you are probably not going to live that much longer than your parents.”63 Unfortunately, consideration of policy factors that contribute to or hinder health care innovation has been limited, at least partly because international comparisons of health care systems generally do not include measures of innovation. We hope that this paper can be a start in reversing this trend. In three of the four general categories of innovation examined in this paper—basic science, diagnostics, and therapeutics—the United States has contributed more than any other country, and in some cases, more than all other countries combined. In the last category, business models, we lack the data to say whether the United States has been more or less innovative than other nations; innovation in this area

appears weak across all nations. In general, Americans tend to receive more new treatments and pay more for them—a fact that is usually regarded as a fault of the American system. That interpretation, if not entirely wrong, is at least incomplete. Rapid adoption and extensive use of new treatments and technologies create an incentive to develop those techniques in the first place. When the United States subsidizes medical innovation, the whole world benefits. That is a virtue of the American system not reflected in comparative life expectancy and mortality statistics. Table 1 Thirty Leading Medical Innovations and Their Place of Origin Innovation64

16. Thomas Boehm, “ How Can We Explain the American Dominance in Biomedical Research and Development?” Journal of Medical Marketing 5 (2005): 158–66. 17. Victor Fuchs and Harold Sox, “ Physicians’ Views of the Relative Importance of Thirty Medical Innovations,” Health Affairs 20 (2001): 30–42. 18. Also included in this category are “ cataract extraction and lens implantation” and “ gastrointestinal endoscopy.” 19. In the case of ultrasonography, the history is so complex and spread over so many countries (including the United States) that it would be difficult to determine which countries were the sites of the most significant contributions. In the case of intravenous (IV) conscious sedation, historical information could not be found. 20. In the case of long-acting opioids, most of the significant advances were in the beginning of the 20th century. In recent history, there have been new preparations and slight advances (i.e., Oxy-contin by Purdue Pharmaceuticals in the United States), but they are relatively minor compared to the initial development of the first long-acting opioids. We therefore chose not to include these examples alongside the more transformative innovations in the table. 21. Central Intelligence Agency, The W orld Factbook, http://bit.ly/4fNSF7. The population of the former Western Europe, although smaller than that of the European Union, is more than 25 percent larger than that of the United States. 22. In the case of drugs developed at pharmaceutical companies, whenever we were unable to find the specific facility where a particular drug was developed, we assumed that it was developed at a facility in the country in which the company was based at the time. 23. In the cases in which an innovation was developed at a foreign facility of a firm, the credit was given to the country in which the facility was located. If, instead, we give the credit to the country in which the firmis based, then there was a significant contribution fromthe United States to 22 of the 27 innovations, including all of the top 10, and a significant contribution fromthe E.U. or Switzerland to 13 of 27, including 5 of the top 10. 24. Iain Cockburn and Rebecca Henderson, “ Public-private Interaction and the Productivity of Pharmaceutical Research,” NBER Working Paper 6018 (Cambridge: National Bureau of Economic Research, 1997). 25. Joseph DiMasi, Christopher-Paul Milne, and Benjamin Zycher, The Truth about Drug Innovation:Thirty-five Summary Case Histories on Private Sector Contributions to Pharmaceutical Science (New York: Manhattan Institute for Policy Research, 2008). 26. This was true of the following classes: fibrates and antifungals. 27. This was true of the following classes: leuko-triene receptor antagonists and the oral hypoglycemic agents. 28. The excluded classes were beta blockers, platelet aggregation inhibitors, MAOIs, NSAIDs, long-acting opioids, immunosuppressants, fluo-roquinolones, and thyroid-stimulating hormones. 29. Three of the classes have both the United States and a European country listed. In the cases in which a drug was developed at a foreign facility of a pharmaceutical firm, the credit was given to the country in which the facility was located. If, instead, we give the credit to the country in which the pharmaceutical firmis based, then there was a significant contribution fromthe United States in 18 of 29 cases, and a significant contribution fromthe E.U. or Switzerland in 15 cases. Whenever we were unable to find the specific facility where a particular drug was developed, we assumed that it was developed at a facility in the country in which the company was based at the time. 30. Central Intelligence Agency, The W orld Factbook. 31. Henry Grabowski and Richard Wang, “ The Quantity and Quality of Worldwide New Drug Introductions, 1982–2003,” Health Affairs 25, no. 2 (March/April 2006): 452–60. 32. Jon Northrup, “ The Pharmaceutical Sector,” The Business of Health Care Innovation , ed. Lawton Robert Burns (Cambridge: Cambridge University Press, 2005), p. 29. 33. IMS Health, Global Pharmaceutical Sales by Region—2007 ,http://bit.ly/2eVeOd. 34. Contract Pharma, Top 20 Pharmaceutical Companies Report , 2009, http://bit.ly/NFNqc. 35. CNN Money, Global 500 , 2009, http://bit.ly/36mTkl.

36. Colin Baker, “ Would Prescription Drug Re-importation Reduce U.S. Drug Spending?” Economic and Budget Issue Brief , Congressional Budget Office, April 29, 2004. 37. James Robinson, The Corporate Practice of Medicine (London: University of California Press, 1999), p. 5. 38. We excluded eight of the 37 drug classes because they received initial FDA approval more than 40 years ago. The results for the remaining 29 classes are in Table 2. As the table makes clear, the U.S. contribution has been significant. Sixteen of the 30 representative drugs were initially developed in the United States, while 15 were developed in the E.U. or Switzerland. (We credit two of the 29 drug classes to both the United States and a European country.) Again, all of these figures should be interpreted in light of the European Union’s notably larger population. 39. Thomas Bodenheimer, “ High and Rising Health Care Costs. Part 2: Technologic Innovation,” Annals of Internal Medicine 142 (June 7, 2005): 932–37. 40. Ibid.: 933. 41. Robinson, The Corporate Practice of Medicine, pp. 1–15. 42. Elliot Fisher et al., “ Health Care Spending, Quality, and Outcomes,” The Dartmouth Atlas Project Topic Brief (February 27, 2009). 43. It may be that high-spending regions encourage innovation, which could indirectly improve health outcomes in all regions. It is therefore possible that, to some extent, the high spending levels in both the high-cost regions within the United States and in the United States overall may be efficient in a dynamic sense. 44. Ramirez de Arellano, “ Patients Without Borders: The Emergence of Medical Tourism,” International Journal of Health Services 37 (2007): 193–98. 45. Martha Lagace, “ The Rise of Medical Tourism: Q&A with Tarun Khanna,” Harvard Business School W orking Knowledge (December 17, 2007). 46. Regina Herzlinger, Market-Driven Health Care:W ho W ins, W ho Loses in the Transformation of America’s Largest Service Industry (New York: Perseus Books, 1997). 47. Clayton M. Christensen, The Innovator’s Prescription (New York: McGraw-Hill, 2009). 48. Regina Herzlinger, W ho Killed Health Care? (New York: McGraw-Hill, 2007). 49. United States General Accounting Office, “ Specialty Hospitals: Geographic Location, Services Provided, and Financial Performance,” GAO-04-167 (October 2003). 50. John Iglehart, “ The Emergence of Physician-Owned Specialty Hospitals,” New England Journal of Medicine 352 (2005): 78– 84. 51. Kate Pickert and Ken Stier, “ How Health Care ReformCould Hurt Doctor-Owned Hospitals,” Time Magazine, July 13, 2009, http://bit.ly/3yNYFI. 52. Christensen, The Innovator’s Prescription , p. 222. 53. David McGregor et al., “ Home Hemodialysis: Excellent Survival at Less Cost, but Still Underutilized,” Kidney International 57 (2000): 2654–55. 54. Kevin McLaughlin et al., “ Why Patients with ESRD Do Not Select Self-Care Dialysis as a Treatment Option,” American Journal of Kidney Disease 41 (February 2003): 380–85. 55. Christopher Blagg, “ The Renaissance of Home Hemodialysis: Where We Are, Why We Got Here, What Is Happening in the United States and Elsewhere,” Hemodialysis International 12 (2008): s2–s5. 56. “ AAKP Urges Senator John Kerry to Support a Home Hemodialysis Pilot Program,” Medical News Today, May 6, 2008, http://bit.ly/4pt7ts. 57. Christensen, The Innovator’s Prescription , pp. 231–33.

When then-Massachusetts governor Mitt Romney signed into law the nation’s most far-reaching state health care reform proposal, it was widely expected to be a centerpiece of his presidential campaign. In fact Governor Romney bragged that he would “steal” the traditionally Democratic issue of health care. “Issues which have long been the province of the Democratic Party to claim as their own will increasingly move to the Republican side of the aisle,” he told Bloomberg News Ser-vice shortly after signing the bill. He told other reporters that the biggest difference between his health care plan and Hillary Clinton’s was “mine got passed and hers didn’t.” Outside observers on both the Right and Left praised the program. Edmund Haislmaier of the Heritage Foundation hailed it as “one of the most promising strategies out there.” And Hillary Clinton adviser Stuart Altman said, ‘‘The Massachusetts plan could be-come a catalyst and a galvanizing event at the national level, and a catalyst for other states.” Today, however, Romney seldom mentions his plan on the campaign trail. If pressed he maintains that he is “proud” of what he accomplished, while criticizing how the Democratic administration that succeeded him has implemented the program. Nevertheless, he now focuses on changing federal tax law in order to empower individuals to buy health insurance outside their employer, and on incentives for states to deregulate their insurance industry. He would also use block grants for both Medicaid and federal uncompensated care funds to encourage greater state innovation. He encourages states to experiment, but does not offer his own state as a model. A Double Failure There’s good reason for his change of position. The Massachusetts plan was supposed to accomplish two things—achieve universal health insurance coverage while controlling costs. As Romney wrote in the Wall Street Journal, “Every uninsured citizen in Massachusetts will soon have affordable health insurance and the costs of health care will be reduced.” In reality, the plan has done neither. Perhaps the most publicized aspect of the Massachusetts reform is its mandate that every resident have health insurance, whether provided by an employer or the government or purchased individually. “I like mandates,” Romney said during a debate in New Hampshire. “The mandate works.” But did it? Technically the last day to sign up for insurance in compliance with that mandate was November 15, though as a practical measure Massachusetts residents actually had until January 1, 2008. Those without insurance as of that date will lose their personal exemption for the state income tax when they file this spring. In 2009, the penalty will increase to 50 percent of the cost of a standard insurance policy. Such a mandate was, of course, a significant infringement on individual choice and liberty. As the

Congressional Budget Office noted, the mandate was “unprecedented,” and represented the first time that a state has required that an individual, simply because they live in a state and for no other reason, must purchase a specific government-designated product. It was also a failure. When the bill was signed, Governor Romney, the media, state lawmakers, and health care reform advocates hailed the mandate as achieving universal coverage. “All Massachusetts citizens will have health insurance. It’s a goal Democrats and Re-publicans share, and it has been achieved by a bipartisan effort,” Romney wrote. Before RomneyCare was enacted, estimates of the number of uninsured in Massachusetts ranged from 372,000 to 618,000. Under the new program, about 219,000 previously uninsured residents have signed up for insurance. Of these, 133,000 are receiving subsidized coverage, proving once again that people are all too happy to accept something “for free,” and let others pay the bill. That is in addition to 56,000 people who have been signed up for Medicaid. The bigger the subsidy, the faster people are signing up. Of the 133,000 people who have signed up for insurance since the plan was implemented, slightly more than half have received totally free coverage. It’s important to note that the subsidies in Massachusetts are extensive and reach well into the middle class—available on a sliding scale to those with incomes up to 300 percent of the federal poverty level. That means subsidies would be available for those with incomes ranging from $30,480 for a single individual to as much as $130,389 for a married couple with seven children. A typical married couple with two children would qualify for a subsidy if their income were below $63,000. What we don’t know is how many of those receiving subsidized insurance were truly uninsured and how many had insurance that either they or their employer was paying for. Studies indicate that substitution of taxpayer-financed for privately funded insurance is a common occurrence with other government programs such as Medicaid and the State Children’s Health Insurance Program (S-CHIP). Massachusetts has attempted to limit this “crowd-out” effect by requiring that individuals be uninsured for at least six months before qualifying for subsidies. Still some substitution is likely to have occurred. The subsidies may have increased the number of Massachusetts citizens with insurance, but as many as 400,000 Massachusetts residents by some estimates have failed to buy the required insurance. That includes the overwhelming majority of those with incomes too high to qualify for state subsidies. Fewer than 30,000 unsubsidized residents have signed up as a result of the mandate. And that is on top of the 60,000 of the state’s uninsured who were exempted from the mandate because buying insurance would be too much of a financial burden. Billion-Dollar Overrun According to insurance industry insiders, the plans are too costly for the target market, and the potential customers—largely younger, healthy men—have resisted buying them. Those who have signed up have been disproportionately older and less healthy. This should come as no surprise since Massachusetts maintains a modified form of community rating, which forces younger and healthier individuals to pay higher premiums in order to subsidize premiums for the old and sick. Thus, between half and two-thirds of those uninsured before the plan was implemented remain so. That’s a far cry from universal coverage. In fact, whatever progress has been made toward reducing the ranks of the uninsured appears to be almost solely the result of the subsidies. The much ballyhooed mandate itself appears to have had almost no impact. The Massachusetts plan might not have achieved universal coverage, but it has cost taxpayers a great

deal of money. Originally, the plan was projected to cost $1.8 billion this year. Now it is expected to exceed those estimates by $150 million. Over the next 10 years, projections suggest that Romney-Care will cost about $2 billion more than was budgeted. And the cost to Massachusetts taxpayers could be even higher because new federal rules could deprive the state of $100 million per year in Medicaid money that the state planned to use to help finance the program. Given that the state is already facing a projected budget deficit this year, the pressure to raise taxes, cut reimbursements to health care providers, or cap insurance premiums will likely be intense. Romney likes to brag that he accomplished his health care plan “without raising taxes.” Unless something turns around, that is not likely to be the case much longer. Moreover, the cost of the plan is also likely to continue rising, because the Massachusetts reform has failed to hold down the cost of health care. When Romney signed his plan he claimed “a key objective is to lower the cost of health insurance for all our citizens and allow our citizens to buy the insurance plan that fits their needs.” In actuality, insurance premiums in the state are expected to rise 10–12 percent next year, double the national average. The Bureaucratic Connector Although there are undoubtedly many factors behind the cost increase, one reason is that the new bureaucracy that the legislation created—the “Connector”—has not been allowing Massachusetts citizens to buy insurance that “fits their needs.” Although it has received less media attention than other aspects of the bill, one of the most significant features of the legislation is the creation of the Massachusetts Health Care Connector to combine the current small-group and individual markets under a single unified set of regulations. Supporters such as Robert E. Moffit and Nina Owcharenko of the Heritage Foundation consider the Connector to be the single most important change made by the legislation, calling it “the cornerstone of the new plan” and “a major innovation and a model for other states.” The Connector is not actually an insurer. Rather, it is designed to allow individuals and workers in small companies to take advantage of the economies of scale, both in terms of administration and risk pooling, which are currently enjoyed by large employers. Multiple employers are able to pay into the Connector on behalf of a single employee. And, most importantly, the Connector would allow workers to use pre-tax dollars to purchase individual insurance. That would make insurance personal and portable, rather than tied to an employer—all very desirable things. However, many people were concerned that the Connector was being granted too much regulatory authority. It was given the power to decide what products it would offer and to designate which types of insurance offered “high quality and good value.” This phrase in particular worried many observers because it is the same language frequently included in legislation mandating insurance benefits. At the time the legislation passed, Ed Haislmaier of the Heritage Foundation reassured critics that “the Connector will neither design the insurance products being offered nor regulate the insurers offering the plans.” In reality, however, the Connector’s board has seen itself as a combination of the state legislature and the insurance commissioner, adding a host of new regulations and mandates. For example, the Connector’s governing board has decreed that by January 2009, no one in the state will be allowed to have insurance with more than a $2,000 deductible or total outof-pocket costs of more than $5,000. In addition, every policy in the state will be required to phase in coverage of prescription drugs, a move that could add 5–15 percent to the cost of insurance plans. A move to require dental coverage barely failed to pass the board, and the dentists—along with several other provider groups—

have not given up the effort to force their inclusion. This comes on top of the 40 mandated benefits that the state had previously required, ranging from in vitro fertilization to chiropractic services. Thus, it appears that the Connector offers quite a bit of pain for relatively little gain. Although the ability to use pretax dollars to purchase personal and portable insurance should be appealing in theory, only about 7,500 nonsubsidized workers have purchased insurance through the Connector so far. On the other hand, rather than insurance that “fits their needs,” Massachusetts residents find themselves forced to buy expensive “Cadillac” policies that offer many benefits that they may not want. Governor Romney now says that he cannot be held responsible for the actions of the Connector board, because it’s “an independent body separate from the governor’s office.” However, many critics of the Massachusetts plan warned him precisely against the dangers of giving regulatory authority to a bureaucracy that would last long beyond his administration. ClintonRomneyEdwardsCare Despite the problems being encountered in Massachusetts, the Romney plan continues to receive a surprising amount of support as a model for reform. The health care plans advocated by all three of the leading Democratic presidential candidates—Hillary Clinton, John Edwards, and Barack Obama—are all substantially the same as Romney’s. They are all variations of a concept called “managed competition,” which leaves insurance privately owned but forces it to operate in an artificial and highly regulated marketplace similar to a public utility. All of their plans include an individual mandate (only for children in Obama’s case, and for everyone in Clinton’s and Edwards’s plans), in-creased regulation, a government-designed standard benefits package, and a new pooling mechanism similar to the Connector. Romney denounces Senator Clinton’s plan as “government run health care,” but there really is very little difference between the Romney and Clinton plans. In addition, several states have been seeking to use Massachusetts as a model for their own reforms. In California, Gov. Arnold Schwarzenegger added an employer mandate to a plan that otherwise looked very much like the Massachusetts plan. Other states considering similar proposals include Alaska, Kansas, Louisiana, Mary-land, Michigan, New York, Oregon, and Washington, as well as the District of Columbia. Although none of these proposals has made it into law, several remain under active consideration. No one can deny that the U.S. health care system needs reform. Too many Americans lack health insurance and/or are unable to afford the best care. More must be done to lower health care costs and increase access to care. Both patients and providers need better and more useful information. The system is riddled with waste, and quality of care is uneven. Government health care programs like Medicare and Medicaid threaten future generations with an enormous burden of debt and taxes. Given these pressures, the temptation for a quick fix is understandable. But, as Massachusetts has shown us, mandating insurance, restricting individual choice, expanding subsidies, and increasing government control isn’t going to solve those problems. A mandate imposes a substantial cost in terms of individual choice but is almost certainly unenforceable and will not achieve its goal of universal coverage. Subsidies may increase coverage, but will almost always cost more than projected and will impose substantial costs on taxpayers. Increased regulations will drive up costs and limit consumer choice. The answer to controlling health care costs and increasing access to care lies with giving consumers more control over their health care spending while increasing competition in the health care marketplace —not in mandates, subsidies, and regulation. That is the lesson we should be drawing from the failure of

Introduction On April 12, 2006, Massachusetts governor Mitt Romney signed into law one of the most farreaching experiments in health care reform since President Bill Clinton’s ill-fated attempt at national health care. The legislation took full effect on July 1, 2007, meaning that we now have had sufficient time to evaluate its successes and failures. The Massachusetts reforms were pioneering in many respects. Among the key components of the bill were • An Individual Mandate. Perhaps the most widely discussed aspect of the Massachusetts reform was its unprecedented “individual mandate,” a requirement that every Massachusetts resident have a minimum amount of health insurance coverage, as defined by the state. Those who do not receive insurance through their employer or a government plan such as Medicare are required to purchase it on their own.1 Initially, a failure to comply with this mandate resulted in the loss of the individual’s personal exemption from the state income tax. That penalty increased to 50 percent of the cost of a standard insurance policy, or up to $912 as of July 1, 2008.2 •An Employer Mandate. In addition to the individual mandate, the Massachusetts reform also imposed a mandate on employers with 10 or more workers. Employers who fail to provide health insurance to their workers are assessed a $295 fee per employee,3 with additional penalties for employers whose workers repeatedly receive uncompensated care.4 And finally, all employers are required to offer their employees a Section 125 plan.5 •Middle-Class Subsidies.The reforms established a new program called Commonwealth Care to help families with incomes up to 300 percent of the poverty level ($66,150 for a family of four) to purchase6 The bill also expanded insurance.eligibility for Medicaid. • The Connector. The Massachusetts reforms also established a new entity, called the Commonwealth Connector, to restructure the individual and small business insurance markets. 7 Intended as a way to enable individuals to purchase personal and portable health insurance on a pre-

tax basis, the Connector authority has evolved into a regulatory body with wide-ranging power over insurance in the state. Health reform advocates on both the left and right have hailed Massachusetts as a model for reform. Numerous states have considered similar plans (although to date none have passed).8 More importantly, the key components of the Massachusetts plan form the core of proposals for national health care reform. In particular, both the Obama administration and congressional Democrats are leaning toward a plan that includes both an individual and employer mandate combined with middleclass subsidies.9 In addition, while he was still a presidential candidate, Obama called for the creation of a Connector-like national “exchange.”10 But experience so far suggests that the “Massachusetts model” actually provides an object lesson in how not to reform health care. The program has failed even by its own goal criteria of achieving universal coverage. It has failed to restrain the growth in health care costs. And it has greatly exceeded its initial budget, placing new burdens on the state’s taxpayers. At the same time, the Massachusetts Plan has increased bureaucratic control over the state’s health care system, limiting consumer choice. And it has set the stage for still more state intervention in the future, including price controls and explicit rationing. Health care reformers in other states and at the federal level should look carefully at the failures of the Massachusetts model, and learn from them.

Expanding Coverage There is no doubt that the Massachusetts reforms have reduced the number of people without health insurance in the state, but by how much is a matter of considerable dispute. According to official state statistics, the state’s uninsurance rate declined from 10.4 percent in 2006 to just 2.6 percent today, leaving just 167,300 state residents without insurance.11 However, there are several reasons for doubting this number. The data show that roughly 80,000 more people have been added to the Medicaid rolls. In addition, approximately 176,000 people were receiving subsidized insurance coverage through the state’s Commonwealth Care program.12 That means 256,000 previously uninsured people were being covered through government programs. The more difficult question is how many uninsured residents obtained unsubsidized coverage. Here the state relied on a telephone survey conducted by the Urban Institute in mid 2008, which estimated an increase in coverage of 187,000 people.13 About 40,000 of these purchased individual insurance, either through the state’s Connector or through the residual individual insurance market outside the Connector. The other 147,000 received coverage through their employer. Such telephone surveys, however, are notoriously unreliable, particularly in the case of measuring health insurance coverage. For example, two groups that are much more likely to go without insurance are non-English-speaking immigrants (both legal and illegal) and young people. Yet, these groups are far less likely to be included on telephone surveys: immigrants because of the language barriers and young people because they lack traditional landline telephones. More rigorous surveys have suggested that the number of uninsured remains far higher. For example, a

door-to-door survey by the Census Bureau, conducted at roughly the same time as the Urban Institute’s phone survey, estimated that 5.4 percent of state residents were uninsured. 14 And an examination of state income tax returns (filers are required to certify their health insurance status on their returns) showed that roughly 5 percent of residents were uninsured as of January 1, 2008.15 And, since lowincome residents, who are more likely to lack insurance, are not required to file state taxes, the actual percentage of uninsured is most likely a percentage point or two higher. Those estimates suggest that more than 200,000 Massachusetts residents remain uninsured.16 Furthermore, if the number of uninsured in the state had indeed been reduced by 74 percent, as suggested by the state, one might expect a comparable reduction in the amount of uncompensated care provided by the state’s hospitals. In reality, the number of people receiving uncompensated care has declined by just 36 percent.17 In fact, one of the original selling points behind the Massachusetts reform was that it would shift subsidies for uncompensated care from hospitals to individuals. Uncompensated care subsidies were supposed to fade away, with the state using the savings to help low- and middleincome residents buy insurance instead. But hospitals now say that the rate of uncompensated care continues to be so high that they cannot dispense with their subsidies. The taxpayers end up paying twice. There are also questions about the degree to which the reduction in the number of uninsured is sustainable going forward. For example, the increase in the number of people receiving employerprovided health insurance appears anomalous at a time when, nationwide, businesses are less likely to provide insurance for their employees. Also, the faltering economy and increase in unemployment will almost certainly cut into that number in the future. In addition, in the face of skyrocketing subsidy costs, the state is facing potential cutbacks to its Commonwealth Care program. It has already instituted eligibility reviews that have removed nearly 25,000 people from the program.18 When Massachusetts passed its reform plan, its supporters hailed it as a means to provide universal health insurance coverage. “All Massachusetts citizens will have health insurance,” announced thengovernor Mitt Rom-ney. 19 Thus, even by the standards of the program’s supporters, it has not met its goals.20 It is also important to recognize that, whatever the increase in insurance coverage, most of the increase is due to subsidies, not the state’s individual mandate. Fully 58 percent of the newly insured are having that insurance paid for by the government, either through Medicaid or Commonwealth Care—proving that if you give something away for free, people are inclined to take it.21 Of the remaining 42 percent, more than three-quarters are receiving insurance through their employer.22 It is impossible to sort out the share of those who are receiving insurance as a result of the employer mandate versus the individual mandate, or who would have received insurance even in the absence of any mandate. We do know that relatively few previously uninsured individuals who had to purchase their own insurance did so. It seems clear, therefore, that the state’s generous subsidies have far more to do with the increase in insurance than does the individual mandate. The evidence suggests a substantial degree of adverse selection taking place. Those signing up for subsidized coverage through the Commonwealth Care program were in poorer health than both the population at large and the previously uninsured population.23 And younger residents, who composed the largest group of the uninsured before the mandate went into effect, continue to make up the largest

group of the uninsured. Slightly more than 35 percent of the state’s remaining uninsured are between the ages of 18 and 25, and more than 60 percent are under the age of 35.24 Before the mandate, those between the ages of 18 and 25 made up roughly 30 percent of the uninsured,25 suggesting that the young (and presumably more healthy) are less likely to comply with the mandate. One of the rationales for having the mandate was the belief that extending insurance to more young and healthy people would “strengthen and stabilize the functioning of health insurance risk pools.”26 However, the combination of subsidies and mandates may actually be making the pool older and sicker. Thus, there seems to be little justification for an individual mandate.

Increased Insurance Regulation/Increased Cost The proponents of the Massachusetts reforms also promised that those reforms would reduce health care costs. Governor Romney said that “the cost of health care would be reduced” and the plan would make health insurance “affordable” for every Massachusetts citizen.27 Supporters suggested that the reforms would reduce the price of individual insurance policies by 25–40 percent.28 In reality, insurance premiums rose by 7.4 percent in 2007, 8–12 percent in 2008, and are expected to rise 9 percent this year. 29 By comparison, nationwide insurance costs rose by 6.1 percent in 2007, just 4.7 percent in 2008, and are projected to increase 6.4 percent this year. 30 On average, health insurance costs $16,897 for a family of four in Massachusetts, compared to $12,700 nationally.31 The five insurance plans available through the Massachusetts Commonwealth Care program, which subsidized care for low- and middle-income individuals, are somewhat cheaper, roughly $2,460–3,460 for an individual policy before application of the subsidy, but those costs, too, have been rising—up 11 percent since the program began for the lowest-cost plans.32 Moreover, the initial low cost for these plans was widely attributed to low bids from two insurers who were attempting to gain customer share through the program’s automatic assignment process. (Individuals participating in Commonwealth Care who do not choose an insurer are assigned to one. The lowest-bid plan receives the majority of assignees, with others receiving assignments based on how close their premiums are to the low bid.)33 Having used their initial low bids as “loss leaders,” these insurers are now pressing for substantial premium increases. Massachusetts has always been among the states with the highest-cost insurance. In part, this is due to the type of technology-intensive medicine practiced in the state and to the domination of the state’s insurance market by a few large insurers. But, it is also partly due to the state’s insurance regulations, including community rating and some 40 mandated benefits.34 The reforms failed to deal with either of those issues. They failed to create the type of consumer incentives that would encourage consumers to become more cost conscious. Since the bill was signed, healthcare spending in the state increased by 23 percent.35 And it generally retained the regulations and mandates that added to insurance costs.36 In fact, the legislation established a new health care bureaucracy, the Connector, which has actually increased insurance regulation, and may have helped drive up costs. The Massachusetts Health Care Connector was designed to combine the current small group and

individual markets under a single unified set of regulations.37 In addition to trying to unify and rationalize two admittedly dysfunctional regulatory schemes, the Connector was also meant as way to allow workers to purchase individual insurance while receiving the same tax break as for employer-provided insurance, thereby breaking the link between employment and insurance. This would give workers portable personal insurance that they could take with them from job to job, and which they would not lose when they lost their job. Unfortunately, the Connector has not lived up to its promise in the latter regard. In fact, as of May 2008, only 18,122 people had purchased insurance through the Connector.38 On the other hand, as some critics feared, the Connector has become an aggressive new regulatory body. To qualify under the mandate, the Connector has decreed that insurance must now (1) include prescription drug coverage; (2) cover preventive care services; (3) have a deductible of no more than $2,000 for individuals or $4,000 for families, with drug deductibles of no more than $250 for individuals and $500 for families; (4) have an in-network out-of-pocket maximum (including deductibles, copayments, and coinsurance) of no more than $5,000 for individuals and $10,000 for families; and (5) have no limit on annual or per sickness benefits.39 These rules do not apply just to the previously uninsured. Individuals who already had health insurance, but whose insurance did not meet these requirements, were required to give up their current insurance and purchase insurance that conformed to the new rules. However, the state postponed the application of the requirements for those who currently have noncomplying insurance until January 1, 2009, meaning that we do not yet have information on how many Massachusetts residents were required to switch plans. In addition, the Connector adds its own administrative costs, estimated at 4 percent of premium costs, for plans that are sold through it.40 Massachusetts health reformers rejected proposals that would have reduced the rising cost of health insurance, such as eliminating regulations that drive up insurance premiums or those that limit competition in the insurance industry. Nor did they create incentives, such as increased cost-sharing, for consumers to become more value-conscious in their purchasing decisions. Instead, they increased regulatory costs and then simply threw money at the system through subsidies. Not surprisingly, therefore, the cost of health care (and health insurance) in Massachusetts continues to rise.

Busting the Budget When the Massachusetts reforms first became law, they were projected to cost about $1.56 billion per year in total, with the largest component, the Commonwealth Care subsidies, costing roughly $725 million per year. As it turns out, those estimates were not even close. By mid 2008, the state was projecting that Commonwealth Care would cost $869 million for FY2009, nearly a 20 percent increase, and more than $880 million in 2010.41 However, the state secretary of administration and finance says that she expects actual costs to be far higher—perhaps even as much as $100 million higher.42 The entire reform plan was projected to cost more than $1.9 billion in 2009, some $300 million above projections.43 State government spending on all health care programs has increased by 42 percent ($595 million) since 2006.44

Part of the spending increase can be traced to greater than anticipated participation. That is, more people qualified for subsidies than was expected. Supporters of the program focus on this aspect, and excuse the growing cost as the price of extending coverage. But, beyond increased participation, the program’s growing cost can also be traced to the failure of the program to reduce health care and insurance costs. As Massachusetts State Senator Jamie Eldridge, one of the early supporters of the plan, recently told a congressional forum: The assumption was that, as more people— and, in particular, more young and relatively healthy people—joined the system, premiums would go down across the board. There was also the assumption that as more people became insured, the number of people going to the emergency room would drop dramatically, saving the Commonwealth money. Neither of those things happened. . . . In fact, health reform has cost the Commonwealth much more than expected.45 At the same time that spending for the reforms was skyrocketing, revenues for the plan were shrinking. For example, assessments under the “play or pay” mandate on businesses were expected to bring in $45 million in its first year and $36 million in 2008. In actuality, it failed to generate any revenue in 2007 and just $7 million in 2008.46 And as Senator Eldridge noted, expected savings from reductions in uncompensated care also failed to materialize. With the health care program expected to contribute as much as one-third of the state’s expected $1.3 billion budget deficit in 2008, Governor Deval Patrick and the legislature imposed a $1 per pack increase in the state’s cigarette tax to help pay for the program. The regressive tax increase, which falls most heavily on the state’s low-income residents, is projected to raise $154 million annually. The state also imposed approximately $89 million in fees and assessments on health care providers and insurers. On the cost-control side, the state imposed some modest cost-sharing increases on Commonwealth Care participants. And as mentioned, the state has begun a review of Commonwealth Care eligibility. Despite these efforts, both cost increases and revenue shortfall are projected indefinitely into the future. Nearly all observers agree that without a concerted effort to control costs, the program is unsustainable. Naturally there is talk of additional tax hikes. In particular, Patrick and Democratic leaders in the Massachusetts legislature are talking about an increase in the $295 assessment for businesses that do not provide health insurance.47 But the state’s ability to raise additional revenue may be constrained, especially in the face of the economic downturn and an FY2009 state budget shortfall that could top $2.4 billion.48 Already, the rules for compliance with the business mandate have been subtly changed in a way that will raise costs for many small businesses. The legislation originally required businesses to either cover 33 percent of the cost of premiums for their employees or have at least 25 percent of their full-time employees enrolled in their company plan. However, last year the legislature changed the “or” to “and.” Small businesses are most likely to have difficulty in meeting both requirements. Many will find themselves facing either significant increases in the cost of employing workers or being required to pay the noncompliance assessment.49 In addition, Patrick has threatened both insurers and health care providers with price controls. Insurers participating in the Commonwealth Care program were ordered to cut reimbursements to providers by

3–5 percent.50 There appears to have been little follow-through on that front, so Patrick has now chosen to attack the insurers directly. “Frankly, it’s very hard for the average consumer, or frankly the average governor, to understand how some of these companies can have the margins they do and the annual increases in premiums that they do,” Patrick mused to the media, shortly before announcing that he would explore whether the state had the power to regulate cap premiums.51 The state may even resort to explicit rationing. In 2008, the legislature established a special commission to investigate the health payment system in a search for ways to control costs.52 In March 2009, the commission released a list of options that it was considering, including “exclud[ing] coverage of services of low priority/low value” under insurance plans offered through Commonwealth Care. Along the same lines, it has also suggested that Commonwealth Care plans “limit coverage to services that produce the highest value when considering both clinical effectiveness and cost.”53 And, while such moves would initially only impact those receiving subsidized coverage, the state is also considering “a limitation on the total amount of money available for health care services,” which is a global budget—the hallmark of government-run health care systems like that in Canada.

Shortages and Waiting Lists Experience with national health care systems around the world has long shown that insurance coverage does not necessarily equate to access to care. Massachusetts is beginning to learn that lesson. As we saw above, the Massachusetts reforms have expanded the number of people with health insurance in the state. Not surprisingly, increased coverage has led to increased utilization. But, at the same time, Massachusetts has done nothing to increase its supply of providers. Indeed, to the degree that it ratchets down on reimbursements, it may reduce that supply. Anecdotal reports suggest that a number of physicians are limiting their practice or refusing to accept new patients.54 The inevitable result of an increased demand chasing a finite supply (in the absence of any form of price rationing) has always been shortages. The impact has been small so far. In 2007, 4.8 percent of state residents reported forgoing care because they could not find a doctor or get an appointment, an increase of 1.3 percentage points since the legislation was signed. For low-income residents, the problem was slightly worse: 6.9 percent couldn’t find a doctor or get an appointment—a 2.7 percentage point hike since 2006.55 Waiting times were a somewhat bigger problem, with the wait for seeing an internist, for example, increasing from 33 days to 52 days during the program’s first year.56 However, in the future, the problems are likely to grow worse, especially if the state follows through on threats to enact cuts in reimbursements and premium caps on insurance (which will almost inevitably be reflected in reimbursement cuts, and/or global budgeting). Such policies can only further reduce the supply of providers, leading to more shortages, more difficulty in finding a doctor, and a longer waiting time if you can find one.

Conclusion When Massachusetts passed its pioneering health care reforms, this critic warned that it would result

in “a slow but steady spiral downward toward a government-run health care system.”57 Sadly, three years later, those predictions appear to be coming true. At a time when other states are thinking of copying Massachusetts, and, perhaps more significantly, the “Massachusetts model” is being discussed as a possible blueprint for national reform, the failures in Massachusetts provide valuable lessons for reformers. Notably, “universal coverage” should not be the primary goal of health care reform. The key issue in health-care reform is not coverage, but freedom—and secondarily, cost. But Massachusetts reformers made universal coverage the lynchpin of their efforts at the expense of any serious effort to control health care costs. As the New York Times noted, “Those who led the 2006 effort said it would not have been feasible to enact universal coverage if the legislation had required heavy cost controls.”58 As a result, they pushed for universal coverage now, and put off “until another day any serious effort to control the state’s runaway health costs.”59 This was a guaranteed recipe for exploding program costs, and is likely now to lead to price controls and other restrictions that will adversely affect the availability and quality of health care. Yet Congress and the Obama administration seem determined to head down the same exact road. The focus of their health care efforts appears likely to be a series of mandates and subsidies in an elusive search for universal coverage.60 There is even likely to be a new government-run (and taxpayer subsidized) program similar to Medicare that will operate in “competition” with private insurance.61 They would essentially create a new entitlement program, without taking any steps to control rising health care costs. Already the administration’s reform plans are expected to cost more $1.5 trillion over the next 10 years.62 It will therefore be necessary either to run up more national debt—at a time when massive future budget deficits threaten to bankrupt the country—or to break President Obama’s pledge not to raise taxes on the middle class.63 And, without any other options, Congress will follow the Massachusetts model and turn to price controls and rationing. Thus, Americans will end up with the worst of all possible worlds: runaway costs and higher taxes followed by bureaucratic control over our health care choices. Supreme Court Justice Louis Brandeis rightly called American state governments “the laboratories of democracy.”64 Under our federalist system of government, states are able to experiment with policies on a small scale before these policies are adopted by the whole nation. Of course, not all experiments are successful. And we can learn just as much from those that fail as from those that succeed. When it comes to health care reform, Massachusetts has provided us with just such an experiment. Three years of experience shows that giving the government greater control over our health care system will have grave consequences for taxpayers, providers, and health care consumers. That is the true lesson of the Massachusetts model.

3. Ibid., Section 47. Governor Romney vetoed this provision using his line-itemveto authority, but the veto was overridden by the legislature. 4. Ibid., Section 45(b). If a company’s employees incur at least $50,000 in uncompensated care, the company may be charged a “ freerider fee” of up to 100 percent of the cost of the care in excess of $50,000. 5. Ibid., Section 48. These are cafeteria plans, authorized under Section 125 of the federal Internal Revenue Code, which allow employees to set aside pre-tax dollars toward payment of insurance premiums, medical care, and dependent care expenses. 6. Ibid., Section 45. 7. Ibid., Section 101. 8. Utah has passed legislation establishing a “ portal,” which in many ways resembles the Connector. But the legislation has no mandates and is not nearly as comprehensive (nor as problematic) as that in Massachusetts. “ 2009 Utah Health Insurance Bills: What Passed?” Utah Insurance Blog, http://insuranceinutah.com/2009/04/03/2009-utah-healthcare-bills-what-passed/. 9. Robert Pear, “ Democrats Agree on a Health Plan; Now Comes the Hard Part,” New York Times , April 1, 2009. 10.See http://www.barackobama.com/issues/healthcare/. 11.Sharon K. Long, Allison Cook, and Karen Stockley, “ Health Insurance Coverage in Massachusetts: Estimates fromthe 2008 Massachusetts Health Insurance Survey,” December 18, 2008, http://www.mass.gov/Eeohhs2/docs/dhcfp/r/pubs/08/hh_survey_08.ppt. 12.Massachusetts cites this number, which was as of July 2008. However, more recent data suggests that enrollment in Commonwealth Care declined to 163,000 as of January 1, 2009, http://www.mass.gov/bb/h1/fy10h1/exec10/hbudbrief20.htm. 13.“ Health Care in Massachusetts: Key Indicators,” February 2009, http://www.mass.gov/Eeohhs2/docs/dhcfp/r/pubs/09/key_indicators_02-09.pdf. 14. U.S. Census Bureau, “ 2008 Annual Social and Economic Supplement, Table HI06: Health Insurance Coverage Status by State for All People,” August 2008, http://www.census.gov/hhes/www/macro/032008/health/h06_000.htm. 15. “ Data on the Individual Mandate and Uninsured Tax Filers, Tax Year 2007,” Massachusetts Department of Revenue, October 2008, http://www.mass.gov/Ador/docs/dor/News/PressReleases/2008/2007_Demographic_Data_Report_FINAL_(2).pdf. 16. Suzanne King, “ Massachusetts Health Care ReformIs Failing Us,” Boston Globe, March 2, 2009. 17. Cedric K. Dark, “ The Massachusetts Experience,” Policy Prescriptions, March 15, 2009, http://www.policyprescriptions.org/? p=275. 18. “ Connector Eligibility,” Healthcare Financial, Inc., June 16, 2008, http://www.hfi-mass.com/news/articles/061608.shtm. 19. Mitt Romney, “ Health Care for Everyone? We’ve Found a Way,” W all Street Journal , April 11, 2006. 20. This is not to say that universal coverage should be the goal of health care reform, and certainly not the primary goal. It has been amply demonstrated by national health care systems in other countries that universal insurance coverage does not necessarily translate into better access to care. See, for example, Michael Tanner, “ The Grass Isn’t Always Greener: A Look at National Health Care Systems Around the World,” Cato Institute Policy Analysis no. 613, March 18, 2008. And while there is evidence that those without health insurance have somewhat worse health outcomes than insured Americans, the evidence of a direct link between health insurance and health is weak. Nor is it a given that expanding insurance coverage is the best or most efficient use of resources when it comes to improving health care. Helen Levy and David Meltzer, “ What Do We Really Know About Whether Health Insurance Affects Health?” Economic Research Initiative on the Uninsured, Working Paper no. 6, December 2001. Moreover, in many cases, expanding insurance coverage will exacerbate the problems of third-party payment. 21. Kevin Sack, “ Massachusetts Faces Costs of Big Health Plan,” New York Times , March 15, 2009. 22. Peter B. Smulowitz, “ A Model for Expanding Health Insurance? Lessons Learned fromthe Massachusetts Experiment,” ACEP State Legislative/ Regulatory Committee, http://acep.org/WorkArea/DownloadAsset.aspx?id=45176. 23. Sharon Long, “ On the Road to Universal Coverage: Impacts of Reformin Massachusetts,” Health Affairs (July/August 2008): w270–84.

32. Jon Kingsdale, “ About Us: Executive Director’s Message,” March 12, 2009, http://www.mahealthconnector.org/portal/site/connector/template.MAXIMIZE/menuitem.3ef8fb03b7fa1ae4a7ca7738e6468a0c/? javax.portlet.tpst=2fdfb140904d489c8781176033468a0c_ws_MX&javax.portlet.prp_2fdfb140904d489c8781176033468a0c_viewID=conte 33. McDonough, p. w293. 34. At the time the Massachusetts reformwas passed, those mandates included: treatment for alcoholism; blood lead poisoning; bone marrow transplants; breast reconstruction; cervical cancer/ HPVscreening; clinical trials; contraceptives; diabetic supplies; emergency services; hair prostheses; home health care; in vitro fertilization; mammo-grams; mastectomy; maternity care and maternity stays; mental health generally (in addition there is a requirement for mental health parity); newborn hearing screening; off label drug use; phenylketon-uria (PKU) formula; prostate screening; rehabilitation services; and well child care. Services for the following providers must also be covered: chiropractors; dentists; nurse anesthetists; nurse midwives; optometrists; podiatrists; professional counselors; psychiatric nurses; psychologists; social workers; and speech or hearing therapists. Insurance policies must also provide coverage to adopted children, handicapped dependents, and newborns. Victoria Craig Bunce, J. P. Wieske, and Vlasta Prikazky, “ Health Insurance Mandates in the States, 2006,” Council for Affordable Health Insurance, March 2006. 35. Robert Seifert and Paul Swoboda, “ Shared Responsibility,” Blue Cross Blue Shield of Massachusetts Foundation, March 2009, http://www.bcbsmafoundation.org/foundationroot/en_US/documents/090406SharedResponsibilityFINAL.pdf. 36. The legislation did include a provision allowing workers ages 19–26 to purchase low-cost, specially designed products offered through the Connector that avoided many of the state’s mandated benefits (although some of the most expensive mandates, including mental health benefits and prescription drug coverage, would still be required). It also repealed the state’s “ any willing provider” rule. Chapter 58 of the Acts of 2006, Section 90. 37. Chapter 58 of the Acts of 2006, Section 101. The law defines the Connector as “ a body politic and corporate and a public instrumentality.” It is designed to operate independent of any other government agency and has a corporate charter, but its board consists of the Massachusetts secretary of Administration and Finance, the state Medicaid director, the state commissioner of insurance, the executive director of the group insurance commission, three members appointed by the governor, and three members appointed by the attorney general. As an entity, it falls somewhere between a government agency and a private corporation. One useful analogy would be the Federal Reserve Board. 38. Robert Steinbrook, “ Health Care Reformin Massachusetts—Expanding Coverage, Escalating Costs,” New England Journal of Medicine 358, no. 26 (2008): 2757–60. 39. McDonough, p. w289.

For example, when Medicare was instituted in 1965, it was estimated that the cost of Medicare Part A would be $9 billion by 1990. In actuality, it was seven times higher—$67 billion. Similarly, in 1987, Medicaid’s special hospitals subsidy was projected to cost $100 million annually by 1992 (just five years later); however, it actually cost $11 billion—more than 100 times as much. And in 1988, when Medicare’s home care benefit was established, the projected cost for 1993 was $4 billion, but the actual cost was $10 billion. Stephen Dinan, “ Entitlements Have a History of Cost Overruns,” W ashington Times , June 16, 2006. 63. Budget deficits are already projected to total more than $9.3 trillion over the next 10 years, even without consideration of the full cost of health care reform. Lori Montgomery, “ U.S. Budget Deficit to Swell Beyond Earlier Estimates,” W ashington Post , March 21, 2009. 64. New State Ice Co. v. Liebman , 285 U.S. 262 (1932).

Health care’s silly season is upon us. If we can be sure of anything, it is that President Barack Obama and his congressional allies will do whatever they can to hide the cost of their health plan. Lucky for them, former Massachusetts Gov. Mitt Romney, a Republican, has shown the way. In 2006, Romney enacted a health-reform package strikingly similar to what Democrats are pushing through Congress, including individual and employer mandates, private health-insurance subsidies, broader Medicaid eligibility and a new health-insurance “exchange.” Lately, Massachusetts officials have been forced to raise taxes and cancel some residents’ coverage to pay for it all. Local headlines are decrying “the forbidding arithmetic of healthcare reform.” Supporters at the Massachusetts Taxpayer Foundation say the cost isn’t nearly as high as many people think. A recent foundation report claims that “The cost of this achievement has been relatively modest and well within early projections of how much the state would have to spend to implement reform.” In The Boston Globe, foundation president Michael J. Widmer writes, “Between fiscal 2006 and 2010, the annual incremental cost from the state budget is less than $100 million, a modest sum for this historic achievement.” Widmer was kind enough to walk me through his organization’s estimates. As it turns out, there’s more than just a little sleight of hand involved. First, the “annual incremental cost”—$88 million—is not the total amount that the law added to the state budget each year, but the average increase from one year to the next. In other words, the total “cost from the state budget” in 2009 is not $88 million but three times that ($264 million). Second, that average “incremental cost” assumes the state will cut payments to safety-net hospitals by $200 million next year. We’ll see about that. Safety-net hospitals are already suing the state for more money. Set aside those assumed savings, and the cumulative “cost from the state budget” for 2009 is actually $408 million. But the larger problem is that the “cost from the state budget” ignores 80 percent of the total cost of RomneyCare. As Widmer explains, state officials only have to scrape up about 20 percent of total new spending themselves. The federal government—which is to say, taxpayers in other states—kicks in another 20 percent through the Medicaid program. The remaining 60 percent appears in no government budget. It is new “private” spending that individuals and employers must undertake according to the law’s dictates. That brings the total cost of RomneyCare to at least $2.1 billion in 2009. Both Widmer and his organization’s report do mention that the law spurred employers to spend an additional $750 million on employee health coverage. But that only accounts for about two-thirds of new private spending. Moreover, they describe that mandated private spending as a benefit of the law, rather

than a cost. Instead of a bargain, RomneyCare is therefore far costlier than conventional wisdom suggests. Beacon Hill is eliminating health coverage for 30,000 legal immigrants, and contemplating a sweeping overhaul of how medical care is purchased, organized, and delivered, just to cope with one-fifth of the law’s cost. Neither is RomneyCare terribly cost-effective. The law covered an estimated 432,000 previously uninsured residents in 2009. That means Massachusetts is covering the uninsured at a cost of about $6,700 per person, or $27,000 for a family of four. The average nationwide cost of an individual policy ($2,600 in 2007) and an employer-sponsored family policy ($12,700 in 2008) are fractions of those figures. RomneyCare demonstrates how hard it will be for Congress to scrape up even 20 percent of the cost of the Democrats’ health plans. The Massachusetts experience also counsels that when Democrats produce a health plan that costs a mere $1.5 trillion, the actual cost will be even higher. This article appeared in the Providence Journal on August 10, 2009.

Introduction In 2006, Massachusetts enacted a sweeping health insurance law known as Chapter 58.1 The law created the nation’s first “individual mandate” to purchase health insurance. All residents whom the Commonwealth deems able to afford health insurance must purchase it or else pay a tax penalty that rises with income. The individual mandate took effect on July 1, 2007, but penalties for noncompliance did not begin until December 31, 2007. Noncompliant residents faced the loss of their personal exemption to the state’s income tax— a penalty of $219. The penalty rose the next year to a maximum of $912—more than four times the 2007 penalty. Each year after 2008, penalties increase at the rate of health insurance premium growth.2 Chapter 58 also established the nation’s second “employer mandate” (behind Hawaii). Beginning July 1, 2007, the law required firms with 11 or more workers to offer health benefits to their workers and to “contribute” a specified amount toward the cost of that coverage or face a tax penalty of $295 per worker.3 The law created or expanded various government subsidies to help residents obtain health insurance. It expanded eligibility for Massachusetts’ Medicaid program (Mass-Health) to children in families with incomes up to 300 percent of the federal poverty level (about $66,000 for a family of four); and to adults who are unemployed (100 percent FPL), HIV-positive (200 percent FPL), or disabled. The law created a new CommCare program to provide subsidies for private health insurance to families earning up to 300 percent of the federal poverty level. Chapter 58 also imposed new rules for private health insurance markets, merged the individual and small-group markets, and created a new health insurance “connector” where individuals and employees of small firms (with 50 or fewer employees) may choose from a variety of health plans. After signing Chapter 58 into law, Gov. Mitt Romney (R) wrote, “Every uninsured citizen in Massachusetts will soon have affordable health insurance and the costs of health care will be reduced.”4 Changes in Massachusetts’ uninsurance rate and health care costs are therefore important measures of the law’s impact. Other important indicators of the law’s success include its impacts on overall health; “crowd-out” of private health insurance (that is, what percentage of insured people simply switched from private insurance to government-supported insurance); and the attractiveness of Massachusetts as a place to live.

How well Chapter 58 performs on these dimensions has particular relevance now that the federal government is considering similar legislation. When President Barack Obama told Congress in early September 2009, “there is agreement in this chamber on about 80 percent of what needs to be done,”5 he was speaking of the provisions in federal legislation that mirror the Massachusetts law: individual and employer mandates; private health insurance subsidies; Medicaid expansions; a new health insurance “exchange”; and other private health insurance regulations. This study uses data from the March 2006–2009 supplements to the Current Population Survey— which cover the 2005–2008 calendar years—to measure Chapter 58’s impact on some of the abovementioned factors. Our study is the first to use CPS data from 2008 to examine coverage and crowd-out. It is also the first to use CPS data to examine Chapter 58’s impacts on self-reported health and inmigration, and the first to explore whether Chapter 58 introduced bias into the CPS’s coverage estimates in Massachusetts. We consider this study to be a first approximation of the effects of Chapter 58 through 2008, and hope that further studies will refine and augment our results.

Methods To evaluate the impact of the Massachusetts health law on coverage levels, crowd-out, health status, and in-migration patterns, we rely on CPS data from 2005 through 2008. The March supplement to the Census Bureau’s CPS has been described as “the survey of record” and “the most viable estimate” of the uninsured.6 The Bureau of the Census administers the CPS for the Bureau of Labor Statistics, which scientifically selects the sample to represent the civilian noninstitutional population. The CPS is the official source for national health insurance estimates like the widely cited estimate of 46 million uninsured U.S. residents. The CPS has asked about health insurance since the 1980s, and those questions have been largely unchanged since 1994.7 The response rate for the March supplement is exceptionally high compared to other voluntary household-based surveys. The nonre-sponse rate for the health insurance questions in Massachusetts in 2008 was 16 percent. Nonresponse rates for other surveys measuring the effects of Chapter 58 have been as high as 55 percent8 and 68 percent.9 Unlike those surveys, the Census Bureau includes residences without telephones by virtue of conducting interviews both by telephone and in person. The CPS data are publicly available from the Census Bureau.10 To our knowledge, ours is the first study to employ data from the March 2009 supplement to the CPS, which covers all of calendar year 2008, and the first to examine Massachusetts two years prior to the mandate (2005–2006) and two years after the mandate (2007–2008). Considerable difficulties arise when we try to measure the impact of a complex piece of legislation such as Chapter 58. For example, the outcomes of interest may be influenced by other changes occurring at the same time. The fact that the various elements of Chapter 58 took effect at different times may further complicate the picture. Similar to Long et. al.,11 we employ a difference-in-differences model to control for many factors that might also influence the outcomes of interest. We compare outcomes in Massachusetts to those of other New England states: Maine, New Hampshire, Vermont, Rhode Island, and Connecticut. We include controls for poverty thresholds, marital status, sex, education, race/ethnicity, and fixed effects for state and year. Our “Chapter 58 effect” is therefore identified from the interaction of state and year. We

weight all regressions with the CPS weights, stratify by age group, and estimate models without imputed values. We attribute any differences between Massachusetts and the remaining New England states to the Massachusetts law. Our overall results on gains in insurance coverage are very similar to those of Long et al. We are unaware of any published estimate of the full cost of Chapter 58, including costs that do not appear in government budgets— which is significant in itself. For data on the cost to the Commonwealth of Massachusetts and the federal government, we rely on estimates published by the Massachusetts Taxpayers Foundation.12 For estimates of the costs imposed on the private sector, we rely on personal communications with staff from the Massachusetts Taxpayers Foundation.13

Coverage Effects A primary objective of Chapter 58 is to expand health insurance coverage in Massachusetts, with the goal of universal coverage. In this section, we examine how many Massachusetts residents remain uninsured, and how much of the increase in coverage since 2006 can be attributed to Chapter 58. How Many Residents Remain Uninsured? For 2003 through 2006, the CPS reported that the uninsured rate in Massachusetts hovered around 10 percent. Massachusetts’ uninsured rate was low compared to the national average of 15 to 16 percent during that period. It was especially low relative to southwestern states, where the uninsured rate often exceeds 20 percent. Various estimates exist of how many Massachusetts residents currently lack health insurance. The Commonwealth relies on one survey that provides an estimate of 2.6 percent uninsured in 2008.14 The Census Bureau’s American Community Survey provides an estimate of 4.1 percent.15 There is controversy over whether the CPS accurately estimates Massachusetts’ uninsured rate, which results from the CPS’s method for dealing with households that do not answer the survey’s questions about insurance status. When a respondent fails to answer a question on the CPS, the Census Bureau imputes a response for that person based on the answers of similar individuals.16 For 2008, the CPS imputes the insurance status of 1 million out of a total of 6.4 million Massachusetts residents to arrive at an uninsured estimate of 5.5 percent.17 The CPS imputes the insurance status of nearly 670,000 nonelderly adults (hereafter: “adults”), or one-sixth of the 4.1 million adult residents. Davern et al. find that the CPS’s imputation procedure tends to overstate the uninsured rate in states like Massachusetts that have relatively low uninsured rates, and that that bias may be greatest in Massachusetts.18 Working with the 1998–2000 March supplements, they estimate that the CPS’s imputation procedure overstated the Massachusetts uninsured rate by 1.8 percentage points, or 13.9 percent—the largest error in any state.19 The authors suggest a rudimentary way to adjust for that bias would be to reduce Massachusetts’ official uninsured rate by 13.9 percent, 20 which yields an estimate of 4.7 percent. Excluding imputed answers from the 2008 sample produces an estimate of 3.8 percent, or 205,472 uninsured residents, which is very close to the ACS estimate.

“Are You Breaking the Law?” Research has not yet explored another potential source of bias related to the CPS’s imputation procedure. Chapter 58 creates incentives for uninsured Massachusetts residents to conceal their true insurance status. Since December 31, 2007, not having health insurance coverage has had legal consequences for Massachusetts residents. Uninsured residents who accurately report their insurance status would be admitting to unlawful activity and subject to penalties.21 In addition, Chapter 58’s individual mandate may have created a social norm that uninsured residents might be reluctant to admit they are violating. If Chapter 58 induces uninsured residents to conceal their insurance status from the CPS, then that would bias the uninsured estimate downward. Uninsured Massachusetts residents can conceal their lack of coverage from government surveys like the CPS in three ways. First, they may refuse to participate in the survey. Second, they may participate in the survey but misrepresent their coverage status. Third, they may participate in the survey but not answer the survey’s health-insurance questions, whether by skipping those questions, refusing to answer them, or terminating the interview early. Nonresponse is more likely for sensitive questions like income.22 Since 2006, insurance coverage may have become a more sensitive question in Massachusetts. Each concealment strategy would bias the CPS estimate of Massachusetts’ uninsured rate in the direction of overstating the law’s impact on the uninsured. If uninsured residents refuse to take the survey, they would be underrepresented in the sample. If they misrepresent their coverage status, that would cause uninsured residents to be counted as insured. If they decline to answer the insurance questions, and the CPS imputes their response, that would further increase the number of households that are counted as insured but that are actually uninsured. We cannot observe the first or second strategies, but we can observe how often respondents do not answer the CPS’s health insurance questions across states and over time. And we can compare that to nonre-sponse rates for other questions in the March supplements. If uninsured Massachusetts residents respond to the incentives to conceal their true insurance status, we would expect to see an increase in the rate of nonresponse to the insurance questions relative to other states and to other questions on the CPS. We find evidence that nonresponse to the CPS’s health-insurance questions increased after Massachusetts enacted its mandate. In one estimation, we compare the nonresponse rates for Massachusetts residents with those of other New England states. We find no overall effect of Chapter 58 on imputations among children, but imputations among adults rose by a statistically significant 2.1 percentage points (standard error: 0.9)—a 9-percent increase. The effect appears particularly strong between 150–300 percent FPL, where initial insurance coverage was relatively low and where compliance requires residents to pay some portion of their premiums. Imputations increased by 5.3 percentage points among children (standard error: 2.2) and 4.7 percentage points among adults (standard error: 2.0) in this income stratum. There was no statistically significant change in imputations among those below 150 percent FPL.23 Table 1 Changes in Response Rates to CPS Health Insurance and Income Questions in Massachusetts after Chapter 58 Any Imputed Health Insurance Item

Any Imputed Income Item

Under 18 N=24,489

0.003 (0.015)

Below 150% FPL N=5,089

0.005 (0.014)

150–300% FPL N=6,004

0.053 (0.022)

Above 300% FPL N=13,396

-0.016 (0.023)

Age 18 to 64 N=51,582

0.021 (0.009)

Below 150% FPL N=7,367

0.021 (0.016)

150–300% FPL N=10,807

0.047 (0.020)

Above 300% FPL N=33,408

-0.016 (0.003)

-0.068 (0.007)

0.015 (0.011)

Notes: Each estimate is a difference-in-differences estimate froma separate ordinary least squares regression. The number of observations is shown for models including all of the 2005–2008 years. All specifications include fixed effects for an individual’s age, state, and year. Robust standard errors are in parentheses, corrected for clustering state-year cell. All results are weighted.

In short, if the entire 2.1 percentage point increase in imputations among adults was the result of them concealing their uninsured status, then the (unadjusted) insurance rate would be 5.1 percent, instead of the 3.8 percent reported by the CPS. These results are consistent with Chapter 58 inducing uninsured Massachusetts residents to conceal their true insurance status. Imputations rise among those between 150–300 percent FPL, who were more likely to be uninsured prior to the law’s enactment, and whom the law forces to purchase health insurance with their own money. Rather than comply with the mandate, some of these “insured” individuals may instead be concealing their lack of coverage by refusing to answer the CPS’s insurancestatus questions. In contrast, there was no discernable change in response rates by individuals below 150 percent FPL, who receive “free” coverage and who face no penalties for not obtaining coverage. Next, we compare nonresponse to insurance-status questions to nonresponse to the CPS’s questions about income. While the response rate for the insurance-status questions fell after the enactment of Chapter 58, the response rate for income-related questions increased. Income imputations fell by 1.6 percentage points for children (standard error: 0.3), and among adults by 6.8 percentage points (standard error: 0.7). This suggests that Massachusetts residents who participated in the survey were not less

forthcoming overall, just less forthcoming about health insurance coverage. We draw a number of conclusions. First, the Commonwealth’s estimate that only 2.6 percent of residents remain uninsured—the lowest estimate available—is most likely too low. More rigorous surveys all yield higher estimates. As noted above, even ignoring imputations, the CPS yields an uninsured rate of 3.8 percent. Second, we conclude that Chapter 58 has introduced a new source of bias into the CPS’s estimate of Massachusetts’ uninsured rate. The 3.8-percent figure is not biased upward by the CPS imputation procedure, but it may be biased downward by the incentives that Chapter 58 creates for uninsured residents to conceal their true coverage status. Whether this is a significant source of bias is unclear. As noted previously, if the entire 2.1-percentage-point rise in imputations among adults were the result of them concealing their uninsured status, then the (unadjusted) uninsured rate would be 5.1 percent.24 To the extent that uninsured residents employed either of the other concealment strategies, the true uninsured rate would be even higher and the number of newly insured residents even lower. We therefore regard 3.8 percent to be a lower-bound estimate of Massachusetts’ uninsured rate. (In the same vein, we consider the below estimates of Chapter 58’s impact on coverage to be an upperbound estimate.) Third, this source of bias may also affect other surveys, including non-government surveys. How Many Newly Insured? The direction of Chapter 58’s effect on insurance coverage is not in dispute. The law appears to have had a significant impact on the number of insured residents. Using two-year averages, the Census Bureau estimates that Massachusetts’ uninsured rate dropped from 9.8 percent in 2005–2006 to 5.4 percent in 2007–2008—a 4.4 percentage point reduction.25 But is the new law solely responsible for this increase, or did other factors contribute to it? To isolate how many additional residents obtained coverage as a result of Chapter 58, we control for other factors that might influence coverage levels by performing a difference-indifferences estimation using only non-imputed observations, as did Long et al. Unlike Long et al., we use other New England states as controls, and we examine 2005–2008, rather than 2004–2007. Our results, presented in Table 2, suggest that Chapter 58 reduced the uninsured rate for children by 2 percentage points, and for adults by 6.7 percentage points. These results are similar to those of Long et al., who found an increase of 6.6 percentage points in coverage among adults.26 The effects were greatest among children between 150 percent and 300 percent of the federal poverty level (7.6 percentage points), and among adults at both below 150 percent (11 percentage points) and between 150 percent and 300 percent of the federal poverty level (14.2 percentage points). These results are unsurprising, since those groups were both the main targets of the new subsidies and subject to penalties under the individual mandate. Our difference-in-differences estimations produce a point estimate of 297,000 Massachusetts residents newly insured as of 2008 as a result of Chapter 58. Table 2 Effect of Chapter 58 on Insurance Coverage, Self-Reported Health, and In-migration

Notes: Each estimate is a difference-in-differences estimate froma separate ordinary least squares regression. Observations with imputed values for health insurance or health status were excluded. The number of observations is shown for models including all of the 2005–2008 years. All specifications include fixed effects for an individual’s age, state, and year. Health results exclude the 2007 calendar year. Robust standard errors are in parentheses, corrected for clustering state-year cell. All results are weighted.

One potential implication of these findings is that Chapter 58’s subsidies did more to expand coverage than the individual mandate. Since Massachusetts introduced both to roughly the same populations at roughly the same time, it is difficult to discern which intervention had the greater impact on coverage levels. Given that we examined 2005–2008, yet obtained similar results to Long et al., one possible interpretation is that the subsidies that became available in 2007 had a greater impact on insurance

coverage than the individual mandate, which only became binding as of December 31, 2007, and whose penalties dramatically increased in 2008. At a minimum, our results suggest that the subsidies had a strong impact on coverage, since the groups targeted with new subsidies saw the greatest coverage gains. We consider 297,000 to be an optimistic estimate of Chapter 58’s effect on insurance coverage, for it assumes that no uninsured Massachusetts residents concealed their insurance status. To the extent that the legal penalties or a new social norm did induce uninsured residents to conceal their coverage status, our results overstate Chapter 58’s impact on coverage. A “back of the envelope” calculation suggests that if the entire 2.1-percentage-point increase in imputations among adults is the result of concealment, for example, then Chapter 58 extended coverage to only 204,000 residents. We thus conclude that the Commonwealth’s estimate of 432,000 newly insured residents 27 is too high, as it lies above the upper bound of the 95-percent confidence interval (327,000) for our point estimate. The number of insured residents may have risen by 432,000 as of 2008, but the portion that can be attributed to Chapter 58 is almost certainly smaller. The Commonwealth’s official estimate appears to overstate the actual impact of the law by 45 percent.

Self-Reported Health A primary reason to expand health insurance coverage is to improve health. An important measure of Chapter 58’s impact, therefore, is whether it improved the health of Massachusetts residents. The CPS enables researchers to gauge changes in health by observing self-reported health status. The March 2009 supplement is more useful for examining the effects of Chapter 58 on health than the March 2008 supplement, which would count individuals as “insured” if they obtained coverage on Dec. 31, 2007. (We would expect little effect on health from one day’s worth of insurance coverage.) By observing self-reported health one year after both the subsidies and penalties took effect, the March 2009 supplement is more likely to capture any effects that Chapter 58 would have on health status. Of course, we would not expect data covering 1.5 years of the experience with Chapter 58 to capture the full effect of the expanded health insurance coverage on health outcomes, but it is reasonable to assume that some improvement should be visible. Researchers such as Janet Currie and Jonathan Gruber find that Medicaid expansions affect health outcomes of infants and children in a short period of time.28 We again perform a difference-in-differences estimation using other New England states as controls. Since the law had been only partially implemented in 2007, we exclude data from 2007 and compare selfreported health in 2005–2006 to 2008.29 We find mixed effects on self-reported health after 2006. Table 2 shows improvements in good (or better) health, but declines in excellent and very good (or better) health. For example, among children, excellent health fell by 6.8 percentage points but good (or better) health increased by 1.1 percentage points. Where the coefficients are statistically significant, those countervailing effects are similar for adults and for most income subgroups. One exception is children under 150 percent FPL: the reduction in excellent health is not statistically significant, but the improvements in both good (or better) and very good (or better) health are statistically significant. Another exception is that adults between 150–300 percent FPL saw a statistically significant increase in very good (or better) health. Yet the same group also saw a drop in excellent health and no discernable change in good (or better) health. Overall, it appears that the distribution of health status compressed, but did not necessarily improve,

in response to Chapter 58. To date, the law appears to have achieved more success in giving residents health insurance than shifting the population toward better health.

Evidence of Crowd-Out One concern that arises when expanding government assistance is the tendency for government subsidies to substitute for, or “crowd-out,” private effort. Crowd-out can occur because those newly eligible for government health insurance subsidies drop their private coverage or because employers cease offering coverage to eligible groups.30 Previous studies of Chapter 58 have found no evidence of crowdout, in that both public and private coverage expanded since 2006.31 Using a difference-in-differences estimation, we find that while coverage generally expanded for children and adults, private insurance coverage fell among certain income groups in Massachusetts relative to other New England states. Table 2 shows that private coverage fell by 4.4 percentage points among children, perhaps driven by a 14.6-percentage-point drop among children below 150 percent of the federal poverty level. Private coverage rose for adults overall, but fell by 6.2 percentage points among adults below 150 percent of poverty level. Again, this result is unsurprising, as Massachusetts targeted government programs principally at those groups. We consider this to be evidence of substantial crowd-out among the poor, as well as a conservative measure of overall crowd-out, given that we cannot observe the extent to which public subsidies offered to those who purchase private insurance merely substituted for private dollars.

In-migration Another potential effect of Chapter 58 is that its taxes and subsidies may affect Massachusetts’ attractiveness as a place to live. The law affects different individuals differently; individuals likely to receive net subsidies may find the Commonwealth a more attractive place to relocate, while those likely to face net taxes would find it less attractive. The March supplement to the CPS measures in-migration for each state, which offers one tool to evaluate any effects that Chapter 58 may have on people’s decisions to relocate to Massachusetts. From 2005 to 2008, in-migration into other New England states fell from 2.4 percent to 2.2 percent. Migration into Massachusetts fell from 1.6 percent to 1.2 percent (data not shown.) A “back of the envelope” difference-in-differences estimate thus suggests that Massachusetts became a less attractive place to relocate after the enactment of Chapter 58. The statistically significant regression-adjusted estimates are broadly consistent with the unadjusted data. Relative to other New England states, Massachusetts saw a 0.61 percentage point decline in inmigration post-Chapter 58 for the sample as a whole. For adults, the decline was 0.87 percentage points. For adults aged 18 to 29, in-migration fell by a sizable 2.8 percentage points—more than four times the magnitude for the entire sample, and a 62-percent drop from baseline in-migration among young adults (data not shown). Since the young tend to have much higher uninsurance rates, and the combination of the individual mandate and Massachusetts’ strict community-rating price controls imposes greater

implicit taxes on young adults than others,32 a reasonable interpretation of these results is that those whom Chapter 58 would most adversely affect voted with their feet and avoided Massachusetts.

Is It Worth the Cost? Chapter 58’s benefits must be weighed against the costs it imposes. 33 Premiums appear to have declined in the non-group market,34 which accounts for 4 percent of private health insurance in Massachusetts.35 It is unclear, however, whether and to what extent that was the result of greater efficiency or cost-shifting to the (larger) small-employer market when Chapter 58 merged the two. Whatever the case, premiums in the other 96 percent of the market moved in the opposite direction. One study found that public and private spending on health insurance have accelerated.36 Another found that premiums for employer-sponsored insurance in Massachusetts grew 21–46 percent faster than the national average over roughly the period studied here.37 The full cost of Chapter 58 includes not only new state and federal government spending, but also any new private-sector spending undertaken to comply with the law’s unfund-ed mandates. The law uses the Commonwealth’s sovereign power to require employers and individuals to purchase health insurance for previously uninsured residents. It even requires some residents who already were insured to purchase additional coverage to comply with the individual mandate’s standard for “minimum creditable coverage.” We are unaware of any effort to tally all of the costs imposed by Chapter 58. The Massachusetts Taxpayers Foundation has formally estimated the cost to the state and federal governments and declared the cost of Chapter 58 to be “modest,” based on the costs to the state government. Working with informal estimates provided by the Massachusetts Taxpayers Foundation, we reach a “back of the envelope” estimate that new state and federal spending amounts to just two-thirds of all new spending under Chapter 58, the remaining third being additional private-sector spending to comply with the individual and employer mandates. We estimate the total new spending to be more than $1 billion in 2008, or 57 percent more than the Massachusetts Taxpayers Foundation formal estimates suggest. We consider this to be a conservative estimate of Chapter 58’s cost for a number of reasons. This estimate includes only new federal spending, state spending, and new spending by previously uninsured residents. It does not include any new spending that previously insured Massachusetts residents must undertake to comply with the individual mandate, which required many residents to purchase coverage with less cost-sharing and more covered services than they had. In addition, there is a strong argument that the true cost of the individual and employer mandates includes not just the new spending mandated by the law, but all mandated spending, including the health insurance premiums that residents had been paying voluntarily. In its official cost estimate of the Clinton administration’s health plan, the Congressional Budget Office included all mandatory premiums in the federal budget.38 Viewed from that perspective, our estimate dramatically understates the cost of Chapter 58.

Is It Cost-Effective? Even less attention has been paid to whether Chapter 58 was the lowest-cost means of achieving

whatever outcomes the law has produced. We are aware of no effort to ascertain whether the benefits of Chapter 58—in terms of better health, better access to care, financial security, etc.—could have been obtained at a lower cost. This appears to be a hole in both the economic literature and the priorities of policymakers. In 2004, Helen Levy and David Meltzer wrote, “There is no evidence at this time that money aimed at improving health would be better spent on expanding insurance coverage than on . . . other possibilities.”39 Levy and Meltzer reaffirmed that conclusion in 2008: The central question of how health insurance affects health, for whom it matters, and how much, remains largely unanswered at the level of detail needed to inform policy decisions. . . . Understanding the magnitude of health benefits associated with insurance is not just an academic exercise . . ., it is crucial to ensuring that the benefits of a given amount of public spending on health are maximized.40 Judicious policymaking is unlikely in the absence of that information.

Conclusion Our analysis of CPS data for 2008 shows that Massachusetts’ health law has had a smaller impact on insurance coverage levels and a much higher cost than supporters claim. Gains in coverage have been overstated by nearly 50 percent, while costs have been understated by at least one-third, and likely more. The law has done little to improve overall self-reported health, though it does appear to have crowded out private health insurance and made Massachusetts a less attractive place to relocate, particularly for young people. These findings hold lessons for the legislation moving through Congress, which largely resembles the Massachusetts law. As in Massachusetts, there has been no effort to estimate the full cost of the legislation—that is, including the mandates it would impose on individuals and employers. The costs of that legislation are therefore far greater than members of Congress and voters believe, while the benefits may be smaller than the conventional wisdom about Massachusetts suggests.

5. White House Office of the Press Secretary, “ Remarks by the President to a Joint Session of Congress on Health Care,” September 9, 2009, http://bit.ly/5OZNAs. 6. M. Davern et al., “ Are the CPS Uninsurance Estimates Too High? An Examination of Imputation,” HSR:Health Services Research 42, no. 5 (October 2007): 2038–2055. 7. The Census Bureau did add a health insurance verification question in the March 2000 supplement. 8. Long, “ On the Road to Universal Coverage.” 9. Sharon K. Long, Allison Cook, and Karen Stock-ley, “ Health Insurance Coverage in Massachusetts: Estimates fromthe 2008 Massachusetts Health Insurance Survey,” Division of Health Care Finance and Policy, Commonwealth of Massachusetts Office of Health and Human Services, December 19, 2008, p. 2, http://bit.ly/7ll8wk. 10. See U.S. Bureau of the Census, Current Population Survey, http://www.bls.census.gov/cps_ftp.html. 11. Sharon K. Long et al., “ Another Look at the Impacts of Health in Massachusetts: Evidence Using New Data and a Stronger Model,” American Economic Review: Papers and Proceedings 99, no. 2 (May 2009): 508–11, http://bit.ly/5VOWKa. 12. Alan G. Raymond, “ Massachusetts Health: The Myth of Uncontrolled Costs,” Massachusetts Taxpayers Foundation, May 2009, http://bit.ly/4WUmTb. 13. Personal correspondence with Massachusetts Taxpayers Foundation president Michael J. Widmer, July 20, 2009, available on request. 14. Commonwealth of Massachusetts Health Connector, “ Health Facts and Figures,” August 2009, p. 4, http://bit.ly/4Tza1G. 15. Joanna Turner et al., “ A Preliminary Evaluation of Health Insurance Coverage in the 2008 American Community Survey,” U.S. Bureau of the Census, September 22, 2009, p. 9, http://bit.ly/4GxDQ1. 16. Davern et al., “ Are the CPS Uninsurance Estimates Too High?” 17. U.S. Bureau of the Census, “ Historical Health Insurance Tables: Table HIA-4. Health Insurance Coverage Status and Type of Coverage by State—All Persons: 1999 to 2008,” September 22, 2009, http://bit.ly/7jG4ND. There is a scholarly consensus that although the March supplement to the CPS attempts to capture the number of respondents who were uninsured for the whole of the previous year, it actually captures the number of respondents who were uninsured on the day they took the survey, which tends to be larger than the number actually uninsured for all of the previous year. See, for example, U.S. Congressional Budget Office, “ How Many People Lack Health Insurance and For How Long?” May 2003, http://bit.ly/6uWfUh. The CPS can nevertheless capture trends in health insurance coverage. 18. “ Th[e] combination of having a relatively low uninsurance rate and having a relatively high number of imputations makes Massachusetts more susceptible to the bias.” M. Davern et al., ‘‘Missing the Mark? Possible Imputation Bias in the Current Populations Survey’s State Income and Health Insurance Coverage Estimates,’’ Journal of Official Statistics 20, no. 3 (2004): 544. 19. M. Davern et al., ‘‘Missing the Mark?” 20. Ibid., p. 546. 21. A small number of Massachusetts residents are exempt fromthe individual mandate. 22. Davern et al., ‘‘Missing the Mark?,” pp. 519–49. 23. Our data reveal that imputed values for health insurance were unusually high in 2005 relative to the 2006–2008 period. More than 30 percent of individuals had at least one CPS health insurance itemimputed in 2005, compared with 13.4–17.6 percent in the subsequent years. On the other hand, imputed values for income vary between 29.6 and 31.1 percent over the full time period. Due to the concern about the high relative rate of imputations in 2005, we re-ran our regressions excluding the 2005 calendar year. Our assessment of the impact of the Massachusetts law on the incentive to not report, if anything, is strengthened by excluding 2005. 24. This figure ignores any increase in imputations among children, which is statistically significant in the 150–300 percent FPL stratum, and therefore underestimates the potential bias frominduced nonresponse. 25. This is statistically significant at a 90-percent confidence interval. U.S. Bureau of the Census, “ Number and Percentage of People without Health Insurance Coverage by State Using 2- and 3-Year Averages: 2005–2006 and 2007–2008,” http://bit.ly/7gcazN.

26. See Sharon K. Long et al., “ Another Look at the Impacts of Health in Massachusetts: Evidence Using New Data and a Stronger Model,” American Economic Review: Papers and Proceedings 99, no. 2 (May 2009): 511, Table 1, http://bit.ly/5VOWKa. 27. Raymond. 28. See Jonathan Gruber and Janet Currie, “ Health Insurance Eligibility, Utilization of Medical Care, and Child Health,” Quarterly Journal of Economics 111, no. 2 (May 1996): 431–66, http://bit.ly/6M6iI8; and Jonathan Gruber and Janet Currie, “ Saving Babies: The Efficacy and Cost of Recent Expansions of Medicaid Eligibility for Pregnant Women,” Journal of Political Economy 104, no. 6 (January 1997): 1263–96, http://bit.ly/8LRWQ9. Presumably, the response of an objective health measure like infant mortality to policy changes should be more inelastic than the response of self-reported health. The main shortcoming of using self-reported health as a health outcome is how self-reported health maps onto more objective measures of health. 29. Including 2007 data reduces the improvements in good (or better) health, yet still shows self-reported health compressing (data not shown). 30. For an overview of the literature on crowd-out, see Jonathan Gruber and Kosali Simon, “ Crowd-out 10 Years Later: Have Recent Public Insurance Expansions Crowded out Private Health Insurance?” Journal of Health Economics 27, no. 2 (March 2008): 201– 17, http://bit.ly/74UzPy. 31. See Sharon K. Long, “ On the Road to Universal Coverage: Impacts of Reformin Massachusetts at One Year Long,” Health Affairs Web Exclusive (June 3, 2008): w271, http://bit.ly/7kTVcG; and Sharon K. Long et al., “ Another Look at the Impacts of Health in Massachusetts: Evidence Using New Data and a Stronger Model,” American Economic Review: Papers and Proceedings 99, no. 2 (May 2009): 508–11, http://bit.ly/5VOWKa. 32. See Aaron Yelowitz, “ ObamaCare: A Bad Deal for Young Adults,” Cato Institute Briefing Paper no. 115, November 5, 2009, http://bit.ly/7qUTXm. 33. Some observers maintain that cost control was not an objective of Chapter 58, in spite of Governor Romney’s promises of lower health care costs. See, for example, Michelle Andrews, “ Health Care: Stop Focusing on the Cost,” CBS Moneywatch , August 6, 2009, http://bit.ly/4EfSN0. 34. U.S. Census Bureau, “ Table HI05. Health Insurance Coverage Status and Type of Coverage by State and Age for All People: 2008,” Current Population Survey, 2009 Annual Social and Economic Supplement, Page Last Modified: September 11, 2009, http://bit.ly/8Qh1LW. 35. Ibid. 36. Robert Seifert and Paul Swoboda, “ Shared Responsibility: Government, Business, and Individuals: Who Pays What for Health?” Blue Cross Blue Shield of Massachusetts Foundation, March 2009, http://bit.ly/4X3NaI. 37. Cathy Schoen, Jennifer L. Nicholson, and Sheila D. Rustgi, “ Paying the Price: How Health Insurance Premiums Are Eating up Middle-Class Incomes,” The Commonwealth Fund, August 2009, p. 8, http://bit.ly/91cTbe. 38. See U.S. Congressional Budget Office, “ An Analysis of the Administration’s Health Proposal,” February 1994, http://bit.ly/5VxkUP. 39. Helen Levy and David Meltzer, “ What Do We Really Know about Whether Health Insurance Affects Health?” in Health Policy and the Uninsured , ed. Catherine G. McLaughlin (Washington: Urban Institute Press, 2004), p. 201. 40. Helen Levy and David Meltzer, “ The Impact of Health Insurance on Health,” Annual Review of Public Health 29 (April 2008): 399–409, http://bit.ly/4ytmhz.

Chapter 15

Romney’s Chronic Health Care Problem by Michael D. Tanner

They haven’t even finished counting 2010 midterm ballots (New York’s 1st congressional district is still undecided), but already potential Republican candidates are testing the presidential waters for 2012. Among the early frontrunners will be former Massachusetts governor Mitt Romney. Romney will have several powerful advantages: name recognition, plenty of money, a strong organization left over from 2008, and a reputation for business competence during an election in which economic issues and job creation are likely to dominate. But he will also have one enormous albatross hanging around his neck: the Massachusetts health-care program. One of the clearest lessons of the 2010 elections was that voters remain strongly opposed to President Obama’s health-care reform. And if voters in general dislike Obamacare, Republican voters positively loathe it. According to the most recent Rasmussen survey, voters overall support repealing Obamacare by a margin of 58–37. Among Republicans, 84 percent favor repeal. Romney’s problem is that, despite his demurrals, the parallels between Obamacare and his 2006 Massachusetts reform plan are striking. Both plans are built around an individual mandate requiring citizens to purchase a government-designed insurance plan. Both plans dramatically increase government subsidies and Medicaid eligibility. Both plans use an exchange to redesign the individual and small-group insurance markets, creating a “managed competition” model for insurance. And both Massachusetts and Obamacare prohibit insurers from managing risk, shifting costs from older and sicker individuals to the young and healthy. Neither Obamacare nor Romneycare includes any substantial cost-containment mechanism. Romneycare has proven to be a disaster in Massachusetts, providing a clear vision of the future under Obamacare. The number of uninsured has been reduced—at great cost—but the program has failed to achieve the promise of universal coverage. The subsidies and other costs have proven an enormous burden for the state budget. Insurance premiums have continued to rise, leading Massachusetts to attempt to impose premium caps and even a global budget. Insurers are losing money and threatening to pull out of the state. It isn’t very hard to imagine his primary opponents preparing their 30-second attack ads. Already, Tea Party activists are raising alarms. Romneycare is “something he’s going to have to explain,” warns Christen Varley, president of the Greater Boston Tea Party, “and it might just be a disaster for him.” Plymouth Rock Tea Party founder Lisa Martin says her distaste for Romneycare has forced her to consider other potential candidates, such as Sarah Palin. And presaging national discontent, Tea Party Express president Amy Kremer told the Christian Broadcasting Network that Romney’s Massachusetts health-care reform will “absolutely not pass muster with members.” Romney has taken to making three arguments in his defense. First, he criticizes Obamacare for its $669

billion in tax increases, claiming that the Massachusetts plan did not increase taxes. That is technically true—if you consider only the legislation as Romney signed it. However, it is also true that the legislation relied heavily on federal subsidies—more than $300 million—and was still underfunded. Romney’s successor was forced both to cut back on some benefits that the plan originally offered and to raise the state’s cigarette tax by $1 per pack ($154 million annually) to help pay for the program. The state also imposed approximately $89 million in fees and assessments on health-care providers and insurers. Second, Romney correctly points out that he used his line-item veto to challenge several objectionable provisions of the bill, including its employer mandate, but had his vetoes overridden by the Democraticcontrolled legislature. To some degree those vetoes were an exercise in political theater, since the override was always a given. In the end, Romney signed the bill itself, even knowing that the objectionable provisions would be put back in. And he continues to support some of the plan’s worst aspects, notably the individual mandate. Finally, Romney criticizes Obamacare as a “one size fits all” federal plan, whereas his plan was implemented in only one state. That’s true. Governor Romney only messed up the health-care system in Massachusetts, while President Obama has messed up health care for the entire country. Of course, as governor, Romney didn’t have the power to impose his model outside of his state. He now says that he opposes any national plan, calling for states to experiment with different approaches as the “laboratories of democracy.” That would certainly be an improvement over Obamacare. On the other hand, he has repeatedly said that he sees the Massachusetts plan as a model for the nation and has urged other states to copy his approach. Other than the defenses above, Romney has so far been surprisingly stubborn, refusing to back down from his backing of the Massachusetts plan, calling it “a conservative plan.” In March, he told Fox News, “I think our plan is working well. And perhaps the best thing I can say about it is that it is saving lives. It is the ultimate pro-life effort, if you will, because people who otherwise could have lost their lives are now able to get the kind of care that they deserve.” As a candidate who has been accused in the past of switching positions in order to curry political favor, Romney may have no choice but to stick with this one. But it is not going to make his road to the White House any easier. This article appeared on National Review (Online) on December 1, 2010.

Chapter 16

RomneyCare: Making a Fool of Every Republican It Touches Since 2006 by Michael F. Cannon

New Jersey Gov. Chris Christie’s (R) hearts former Massachusetts Gov. Mitt Romney (R), so much that Christie says it is “completely intellectually dishonest” to compare RomneyCare to ObamaCare. Why? Because Romney didn’t raise taxes, and President Obama did. Oh. Avik (pronounced O-vik) Roy explains how Christie gets RomneyCare so very, very wrong: There isn’t a single person, left or right, who follows health policy seriously who disagrees with the assertion that Romneycare was the model for Obamacare. And Massachusetts has had to raise taxes, after Romney left office, to pay for the law’s significant cost overruns. Here are some examples, left and right. But Roy omits a few important points. 1. Mitt Romney increased taxes the moment he signed RomneyCare. RomneyCare increased net government spending. That in itself is an increase in the tax burden. All that remains to be determined is who will pay for that added spending and when they will pay it. The fact that the incidence of that added tax burden fell after Romney left office does not mean that’s when the added tax burden was created. 2 . Mitt Romney has raised taxes on as many people as Barack Obama has. Half of RomneyCare’s new spending was financed by the federal government through the Medicaid program, which is financed through federal taxes, which fall on taxpayers in all 50 states. That means that when Romney financed half of RomneyCare’s new spending by pulling down more federal Medicaid dollars, he increased taxes on residents of all 50 states. 3. RomneyCare was born of, and expanded, a corrupt scheme by Massachusetts politicians to tax residents of all 50 states. What motivated Romney to enact RomneyCare, as former Romney/Obama adviser Jonathan Gruber explains here, was the widespread desire (within Massachusetts) to hang on to $385 million of federal Medicaid money that Massachusetts had secured using one of Medicaid’s notorious and fraudulent “provider tax” scams. In other words, the whole purpose of RomneyCare was to enable Massachusetts to hold on to $385 million that it received by defrauding and taxing residents of other states. And of course, Romney/RomneyCare caused the tax burden that Massachusetts effectively imposes on nonMassachusetts residents to grow. Christie is so laughably wrong about RomneyCare that one cannot help but smile that his remarks

came during the same news cycle as this: Newly obtained White House records . . . show that senior White House officials had a dozen meetings in 2009 with three health-care advisers and experts who helped shape the health care reform law signed by Romney in 2006. . . . One of those meetings, on July 20, 2009, was in the Oval Office and presided over by President Barack Obama, the records show. “The White House wanted to lean a lot on what we’d done in Massachusetts,” said Jon Gruber, an MIT economist who advised the Romney administration on health care and who attended five meetings at the Obama White House in 2009, including the meeting with the president. “They really wanted to know how we can take that same approach we used in Massachusetts and turn that into a national model” . . . Romney said the people involved in the White House meetings were “consultants,” not “aides” . . . [Gruber said,] “If Mitt Romney had not stood up for this reform in Massachusetts . . . I don’t think it would have happened nationally. So I think he really is the guy with whom it all starts.” All of which is pretty much what my colleague/boss David Boaz and I have been saying since April 2010 in this well-worn Cato video. This article was posted on October 12, 2011 on [email protected]

Chapter 17

RomneyCare Just Got $150 Million More Expensive by Michael F. Cannon

One of the ways Massachusetts officials have tried to temper RomneyCare’s cost overruns was by denying participation to legal immigrants. Last week, the Commonwealth’s highest court ruled that restriction violates the Massachusetts Constitution: Massachusetts cannot bar legal immigrants from a state health care program, according to a ruling issued Thursday by the state’s highest court . . . The ruling said that a 2009 state budget that dropped about 29,000 legal immigrants who had lived in the United States for less than five years from Commonwealth Care, a subsidized health insurance program central to this state’s 2006 health care overhaul, violated the State Constitution. “This appropriation discriminated on the basis of alienage and national origin,” wrote Justice Robert J. Cordy of the Supreme Judicial Court, ruling that the action “violates their rights to equal protection under the Massachusetts Constitution.” . . . State officials say they will abide by the decision, although they are not yet sure how to pay for the change. “This decision has significant fiscal impacts for the commonwealth, adding somewhere in the range of $150 million in annual costs to what is already a very challenging budget,” said Jay Gonzalez, secretary of administration and finance. No doubt their “pay for” will involve another unpopular minority. Former Romney/Obama advisor Jonathan Gruber has written that RomneyCare was already costing the state $50 billion more than projected by 2009. Of course, supporters have been hiding RomneyCare’s costs (and exaggerating its benefits) all along. This article was posted on January 10, 2012 on [email protected]

Introduction Democratic presidential nominee Sen. Barack Obama (IL) has proposed an ambitious plan to reform America’s health care sector. According to his campaign website, “Obama will sign a universal health care plan into law by the end of his first term in office. His plan will provide affordable, quality health care coverage for every American.”1 Obama proposes to accomplish those goals with a number of reforms. He would create a “National Health Insurance Exchange,” where Americans could choose among a number of private insurance plans, or opt for a new health plan run by the federal government and modeled on the Medicare program. Through the Exchange, Obama would have the federal government regulate the content and price of all health insurance plans offered in the United States. Obama would require employers to contribute to the cost of their employees’ health insurance or pay a tax. He would require all parents to obtain health insurance for their children. And he would expand existing government health insurance programs such as Medicaid and the State Children’s Health Insurance Program.2 Rather than engage in a detailed critique of Obama’s health-care plan, 3 many critics prefer to label it “socialized medicine.”4 Is that a fair description of the Obama plan and similar plans? Over the past year, prominent media outlets and respectable think tanks have investigated that question and come to a unanimous answer: no. Those investigations leave much to be desired.

The Bogeyman That Just Won’t Die The phrase “socialized medicine” has been used to defame Harry Truman’s proposed national health insurance program (1945), Medicare (1965), Bill Clinton’s Health Security Act (1993), and proposals to expand the State Children’s Health Insurance Program (2007). In the 2008 presidential campaign, it has been deployed against every Democratic candidate’s health care plan—as well as the Massachusetts reforms then–governor Mitt Romney (R) signed into law in 2006.5 To say that this epithet gets under the Left’s skin would be putting it mildly. For the past year, supporters of universal coverage have been hard at work trying to neutralize, in the words of Rutgers

professor David Greenberg, the “talismanic power” of this “old slayer of reform proposals past,” and recast the phrase as a piece of “atavistic Cold War–era alarmism.”6 “‘Socialized medicine’ is the bogeyman that just won’t die,” wrote Yale political scientist Jacob Hacker in the Washington Post.7 In a study for the left-leaning Urban Institute, researchers Stan Dorn and John Holahan conclude, “It is a significant exaggeration to claim that proposals like [the] plans advanced by the leading Democratic presidential candidates represent steps toward socialized medicine.”8 In April 2008, the Urban Institute held a public forum titled “What Is Socialized Medicine and Is It Relevant to Health Care Reform?” where scholars dismissed claims that Obama’s and similar plans would move America toward socialized medicine. 9 The New York Times , the Associated Press, and National Public Radio have all run ostensibly objective stories with the same purpose.10 Of those organizations, only the Associated Press bothered to solicit input from anyone who thinks such claims are valid. Perhaps the only fair hearing the charge has received came during a presidential debate in 2007, when a journalist likened Sen. Hillary Clinton’s (D-NY) health care reform plan to socialized medicine. “I have never advocated socialized medicine,” Clinton responded testily. When her interlocutor objected, “But that’s what universal medicine is,” Clinton turned the question back on him. “Do you think Medicare is socialized medicine?” she asked. “To a degree, it is,” he replied. “Well, then, you are in a small minority in America,” Clinton responded.11 Actually, he’s not. A recent poll by Harris Interactive and the Harvard School of Public Health found that a majority of responders— and fully 60 percent of those who claim to know what the phrase means —consider Medicare to be socialized medicine. Even larger majorities took the journalist’s side on whether Clinton supports socialized medicine (69 percent of those who claim to know the term’s meaning) and whether universal coverage equals socialized medicine (79 percent).12 That’s not necessarily bad news for supporters of socialized—er, universal coverage. Seventy percent of Democrats think socialized medicine would improve American health care, whereas 70 percent of Republicans say the opposite. Independents are evenly split. Nevertheless, supporters of universal coverage are scrambling to inoculate themselves against the charge that they are pushing “socialized medicine,” principally by attempting to narrow the term’s definition.

Defining Socialism Down At the above-mentioned forum, Urban Institute president and former Congressional Budget Office director Robert Reischauer claimed, “Classic socialism involves government or collective ownership of the means and distribution of production. . . . Truly socialized medicine doesn’t exist anywhere in the world.”13 He’s right. But were we to define everything so narrowly, we would find that capitalism doesn’t exist anywhere in the world, either. Neither does democracy. Others, such as Dorn and Holahan, suggest that medicine can’t be considered socialized if a country retains a large role for the private sector. They write, “Strictly speaking, socialized medicine involves government financing and direct provision of health care services, as with the traditional British system.” The Obama plan and other major Democratic plans cannot be considered socialized medicine because

“none would overturn the dominant role of private insurance and private providers in America’s health care system.”14 But that’s not quite right, either. There is little functional difference between health care system A, a public program through which the government taxes and spends your money on its health care priorities, and health care system B, a completely “private” system in which the government forces you to spend your money on identical priorities. In a paper for the left-wing Center for American Progress, University of Texas public affairs professor Jeanne Lam-brew and colleagues write that the concept of socialized medicine “has been embraced, demonized, and misunderstood since the early 20th century in the United States.” Nevertheless, they acknowledge that a (nominally) private sector is no barrier to socialized medicine: “the government role in socialized medicine systems [can include] public financing of private insurance and providers.”15 Clinton, Dorn, and Holahan suggest that health care systems cannot be fairly described as socialized if they provide adequate access to care. In her exchange with the journalist, Clinton responded, “Medicare is a system that we fund through our paychecks. And yes, the government pays the bills. But no government bureaucrat tells you what doctor you have to go to or what hospital you have to go to.”16 Dorn and Holahan write that “strict limits on consumer choice, rationing, delays, and poor quality [are] all concerns traditionally associated with socialized medicine. These concerns, however, do not apply to the . . . plans advanced by leading Democratic candidates. . . . ”17 Again, this notion does not sit well. Barriers to access occur when the government limits spending below what is required to meet patients’ demand for medical care. To say that socialized medicine only exists when there are access problems (e.g., waiting lists) is to make the rather curious argument that socialized medicine would disappear if the government wrote bigger checks. The boldest attempt to narrow the definition of socialized medicine comes from University of North Carolina–Chapel Hill health policy professor Jonathan Oberlander. In a 2007 interview with National Public Radio, Oberlander wryly noted that the American Medical Association has used the term to describe most anything they do not like, including free-market innovations like health maintenance organizations. Oberlander therefore concludes that the term “socialized medicine” has no meaning at all.18 We’ve seen this sort of tactic before. In a 1993 journal article titled “Defining Deviancy Down,” the late senator Daniel Patrick Moyn-ihan (D-NY) argued that when deviant behavior grows beyond the amount that society can “afford to recognize,” society will cope by narrowing its definition of deviancy.19 Similarly, supporters of universal coverage are trying to convince the public that policies generally considered socialist really aren’t.

What Is Socialized Medicine? Contrary to Oberlander’s claim—and the physician lobby’s naked opportunism—a reasonable definition is possible. Socialized medicine exists to the extent that government controls medical resources and socializes the costs. We might even award countries an extra red rose—the official symbol of the Socialist International20 —if they socialize the costs according to the Marxist principle of “from each according to his ability.” Notice that under this definition, it is irrelevant whether we describe medical resources (e.g., hospitals,

employees) as “public” or “private.” What matters—what determines real as opposed to nominal ownership—is who controls the resources. The particular decisions that government makes about those resources are likewise irrelevant. It matters not whether the government is stingy about medical spending (as in Canada’s Medicare system, the British National Health Service, or the U.S. Medicaid program) or obscenely lavish (as in the U.S. Medicare program). What matters is who decides. By that definition, America’s health sector is already well more than half socialized. Government purchases 46 percent of all medical care.21 In a tip of the hat to Karl Marx, government finances that spending largely with tax rates that rise with one’s earnings. Oberlander and others posit that government ultimately controls about 60 percent of U.S. health spending.22 According to Holahan, “all but 5 percent of the U.S. population that is insured receive government assistance” of one form or another. 23 In the Harris/Harvard poll, the public acknowledged the importance of who controls the money: 73 percent said that socialized medicine exists when “the government pays most of the cost of health care.”24 Yet controlling the money that purchases medical services is only one among many ways that government controls America’s medical resources: • Medical personnel. Federal and state governments rarely employ physicians. But state-level clinician licensing laws do control the number of physicians, who can hire them, where medical professionals can practice, and what tasks they may perform.25 Those laws and the Medicare and Medicaid programs largely determine how and how much physicians and other clinicians will be paid. • Medical products. Government doesn’t manufacture medical products, but it sets prices for most of them through the Medicare and Medicaid programs. The federal Food and Drug Administration controls whether, how, and to whom medical products may be marketed and sold. • Physical capital.Most U.S. hospitals are privately owned. Through “certificate-of-need” laws, however, state governments frequently control who can open a hospital or invest in new equipment. Federal tax policy greatly influences hospitals’ corporate form (profit vs. nonprofit). • Health insurance. Most Americans have private health insurance. Yet state and federal governments control what kind of health insurance we may purchase, how much we will purchase, where we may purchase it, and often the premiums we will pay. The list goes on. Oberlander himself argues that few Americans understand the extent to which government already controls their health care.26 To paraphrase Keyser Soze, the greatest trick that supporters of socialized medicine ever played was to convince the American people we don’t already have it.27 The reasonable definition suggested here (socialized medicine exists to the extent that government controls medical resources and socializes the costs) allows for gradations of socialism and makes sense of the public’s belief that Medicare and universal coverage constitute socialized medicine. Medicare gives government enormous control over the medical resources consumed by beneficiaries and nonbeneficiaries alike.28 Universal coverage likewise requires extensive government controls, as markets will not provide health insurance to everyone. Harvard health economist David Cutler writes, “Universal coverage necessarily means a larger role for government than is the case now.”29

Conclusion This definition also suggests that Obama’s health care plan, and indeed all attempts at universal coverage, would socialize medicine even further. Though no rigorous projections have been done on the Obama plan, the Lewin Group estimates that a similar plan would enroll 40 million people in a new government insurance program, which would be akin to doubling the Medicare rolls. The Lewin Group projects that plan would increase federal spending by more than $140 billion per year, 30 which some observers consider a vast underestimate.31 Further, Obama’s proposed National Health Insurance Exchange would let government dictate who must purchase coverage, how much coverage they must purchase, and the premiums for every insurance policy in the nation. Reasonable people can disagree over whether Obama’s health plan would be good or bad. But to suggest that it is not a step toward socialized medicine is absurd. Public opinion belies that absurdity. The Harvard/Harris poll reports that, of those who claim to know what socialized medicine is, 57 percent believe Obama supports it.32 Obama’s supporters belie that absurdity. Some, including New York Times columnist Paul Krugman, support the Obama plan because it would lead to socialized medicine. Krugman writes hopefully that the Obama plan (and other major Democratic plans) “could evolve into single-payer over time.”33 “Singlepayer” is shorthand for a health care system, like Canada’s, where the government pays all the bills. Even health policy analysts consider single-payer a form of socialized medicine.34 Finally, Obama himself belies that absurdity. He has repeatedly signaled his support for a single-payer health care system. In 2003, Obama stated, “I happen to be a proponent of a single-payer, universal health care plan.”35 At a town hall meeting in August 2008, Obama responded to a question about the single-payer concept, “If I were designing a system from scratch, I would probably go ahead with a single-payer system.” He then hinted that, once implemented, his reform plan could take Krug-man and like-minded supporters where they ultimately want to go: “my attitude is let’s build up the system we got . . . [and] we may . . . over time . . . decide that there are other ways for us to provide care more effectively.”36 Unfortunately, such absurdities often pass for impartial journalism and informed commentary at major media outlets and policy organizations, while one-sided events staged to arrive at foregone conclusions often pass for debate. At the Urban Institute forum, Susan Dentzer, editor-in-chief of the journal Health Affairs, remarked, “The people who like socialized medicine don’t call it that.”37 Indeed they don’t, but they really can’t blame others for doing so. There’s more substance than smear to the charge.

Chapter 19 Health Care Reform: Questions for the President by Michael F. Cannon

“Health care reform is on life support,” says Rep. Jim Cooper of Tennessee. And he’s a Democrat. President Obama has spent months building momentum for health care reform. But when the Congressional Budget Office put the price tag near $2 trillion, it stopped reform dead in its tracks. What Senate Finance Committee chairman Max Baucus, D-Mont., once called “nearly inevitable” now seems much less so—and that’s before supporters have confronted the really tough questions. Before this debate is over, Obama should answer a few questions about his plans for reform, including:

• Mr. President, in your inaugural address and elsewhere, you said you are not interested in ideology, only what works. Economists Helen Levy of the University of Michigan and David Meltzer of the University of Chicago, where you used to teach, have researched what works. They conclude there is “no evidence” that universal health insurance coverage is the best way to improve public health. Before enacting universal coverage, shouldn’t you spend at least some of the $1 billion you dedicated to comparative-effectiveness research to determine whether universal coverage is comparatively effective? Absent such evidence, isn’t pursuing universal coverage by definition an ideological crusade? • A draft congressional report said that comparative-effectiveness research would “yield significant payoffs” because some treatments “will no longer be prescribed.” Who will decide which treatments will get the axe? Since government pays for half of all treatments, is it plausible to suggest that government will not insert itself into medical decisions? Or is it reasonable for patients to fear that government will deny them care? • You recently said the United States spends “almost 50 percent more per person than the next most costly nation. And yet . . . the quality of our care is often lower, and we aren’t any healthier.” Achieving universal coverage could require us to spend an additional $2 trillion over the next 10 years. If America already spends too much on health care, why are you asking Americans to spend even more? • You have said, “Making health care affordable for all Americans will cost somewhere on the order of $1 trillion.” Precise dollar figures aside, isn’t that a contradiction in terms? • Last year, you told a competitiveness summit that rising health care costs are “a major anchor on the ability of American business to compete.” In May, you wrote, “Getting spiraling health care costs under control is essential to . . . making our businesses more competitive.” The head of your Council of Economic Advisors says such claims are “schlocky.” Who is right: you or your top economist? • You recently told an audience, “No matter how we reform health care, we will keep this promise to the American people. . . . If you like your health care plan, you’ll be able to keep your health care

plan, period. No one will take it away, no matter what.” The Associated Press subsequently reported, “White House officials suggest the president’s rhetoric shouldn’t be taken literally.” You then clarified, “What I’m saying is the government is not going to make you change plans under health reform.” Would your reforms encourage employers to drop their health plans? • You found $600 billion worth of inefficiencies that you want to cut from Medicare and Medicaid. If government health programs generate that much waste, why do you want to create another? • You and your advisors argue that Medicare creates misaligned financial incentives that discourage preventive care, comparative-effectiveness research, electronic medical records, and efforts to reduce medical errors. Medicare’s payment system is the product of the political process. What gives you faith that the political process can devise less-perverse financial incentives this time? • You claim a new government program would create “a better range of choices, make the health care market more competitive, and keep insurance companies honest.” Since when is having the government enter a market the remedy for insufficient competition? Should the government have launched its own software company to compete with Microsoft? Are there better ways to create more choices and more competition? • When government entered the markets for workers compensation insurance, crop and flood insurance, and disaster insurance, it often completely crowded out private options. Do you expect a new government health insurance program would do the same? • You have said there are “legitimate concerns” that the government might give its new health plan an unfair advantage through taxpayer subsidies or by “printing money.” How do you propose to prevent this Congress and future Congresses from creating any unfair advantages? President Obama needs to address questions these directly. The health of millions depends on his answers. This article appeared on ABC News.com on June 24, 2009.

The healthcare law that President Barack Obama signed on 23 March stands among the most sweeping pieces of social legislation in the United States’ history. By 2014, it will have conscripted nearly the entire U.S. population into a compulsory health insurance scheme. Whether the law deserves to be seen as a reform, however, depends on one’s perspective. To the Left, the law is milquetoast. It fails to establish a ‘single-payer’ health care system, as adopted by Canada or the UK, or even a robust ‘public option’ to compete with private insurers. ‘ObamaCare’ likewise infuriates the Right, which considers the law to be a great leap toward socialism—conservatives thought it only fitting when Comrade Fidel hailed the new law as a ‘miracle’. The law’s supporters, meanwhile, probably felt French President Nicolas Sarkozy’s backhanded compliment to be more appropriate: ‘Welcome to the club of countries that does not dump its sick people.’ On the surface, America appears to deserve both entendres. The U.S. had been the last of the economically developed nations not to provide a government guarantee of health insurance coverage to all its citizens. To its European friends, that was the most baffling aspect of a healthcare system already rife with illogic. But President Obama has now issued such a guarantee. Nearly all legal U.S. residents must purchase health insurance by 2014, under threats of fines and imprisonment. Private insurers may vary premiums based on age and smoking status, and for individuals versus families; but they may neither deny coverage to the sick nor charge them higher premiums than anyone else. Those whom the government deems unable to afford coverage will either receive it directly from the government or via subsidized private insurance. Thus it finally appears—on paper, anyway—as though the U.S. will no longer deny medical care to sick people. There is, of course, many a slip twixt the cup and the lip. Governments everywhere do a better job of issuing guarantees than delivering on them. For decades, the U.S. government has guaranteed medical care to low-income children through the Medicaid program. That guarantee, however, did not prevent the death of a 12-year-old Maryland boy named Deamonte Driver. In 2007, Driver succumbed to an overwhelming infection that began in an abscessed tooth. His senseless death could have been prevented with a simple tooth extraction, yet his mother could not find a dentist willing to accept Medicaid’s meager payments. Of the estimated 32 million uninsured that the new law will cover, about half can expect the same insurance that Driver was given. Indeed, every member of Sarkozy’s ‘club’ has its stories of sick people who have been ‘dumped’ in one manner or another, despite laws that officially preclude such things from ever happening. In 2005, Canada’s Supreme Court wrote of its country’s Medicare system: ‘Access to a waiting list is not access to healthcare. As we noted above, there is unchallenged evidence that in some serious cases, patients die as a result of waiting lists for public health care.’ The British, meanwhile, often seem more content to let the National Health Service shortchange its patients than to let an American lecture them about how

often it happens. The checkered history of government guarantees is why so many Americans—a majority, in fact— oppose President Obama’s new law, which they believe will move the U.S. even further from Sarkozy’s ideal world than it is now. Consider the requirement that insurers charge everyone of a given age the same premium, regardless of their health status. Despite its compassionate overtones, this requirement will effectively deny care to sick Americans who are content with their existing coverage. If healthy people cost $5,000 to insure and sick people cost $25,000, forcing insurers to charge the same $10,000 premium turns every sick person into a $15,000 dollar liability. Consequently, insurance plans that provide quality care to those sick patients will quickly go out of business, as research by one of President Obama’s economic advisors confirms. If private insurers are to survive, then they will do whatever they can to avoid the sick, including denying their claims, because that is what the government’s price controls reward. Or consider how those same price controls could cause private markets to collapse. My colleague Victoria Payne and I calculate that under Obama’s law, healthy individuals could save $3,000 annually— and families of four as much as $8,000—by dropping their coverage, paying the fines, and waiting until they are sick to buy coverage again. Since insurers would be required to cover them at standard premiums, healthy people would have little to lose. Perhaps Americans’ sense of social solidarity will nevertheless oblige them to shell out thousands of dollars each year to private insurance companies for nothing in return. Or perhaps healthy people will drop their coverage, premiums will rise, and even more healthy people will drop their coverage in an ever more vicious cycle. Technically, in any event sick Americans will still have a legal right to coverage, but they may find this ‘guarantee’ to be of cold comfort when that ‘right’ may only be realized through a private insurer that doesn’t want them or a government program that doesn’t think their health is worth much. Of greater comfort would be innovations that genuinely made healthcare more effective, affordable and secure. Fortunately, whatever the faults of the healthcare sector (and there are many) the U.S. has long proven itself to be conducive to medical innovation, both technical and administrative. A recent Cato Institute study found that the U.S. has been home to most of the important medical advances made over the past 40 years. In some fields, America contributes more important innovations than all other nations combined. These innovations are preventing sick people from being ‘dumped’ throughout the world. Furthermore, when the U.S. government has given market forces room to breathe, entrepreneurs have devised innovative ways of delivering healthcare. Integrated health plans such as Kaiser Permanente, which has fared well in comparison with the NHS, reduce the cost of care and deploy electronic medical records that make medicine better, safer and more convenient. American innovation has also made health insurance more secure. Decades ago private markets catered to the $5,000 patient’s fear of becoming a $25,000 patient by guaranteeing that her premiums would rise no faster than the rest of the pool, no matter how sick she got. Private markets are now just one step away from offering the ‘holy grail’ of health insurance guarantees: coverage that both protects against higher premiums and makes insurers compete to cover the sick, instead of avoiding them. The price controls that Obama’s law imposes on pharmaceuticals and health insurance will prevent the market from expressing a demand for further innovations. Massachusetts enacted a nearly identical law in 2006, which is already threatening to extinguish innovation in payment systems and healthcare delivery. President Obama could have come up with a law making healthcare better, more affordable and more

secure through the bottom-up process of innovation. Instead, he extended the world’s most expensive health care system to 32 million more people. And he did so in a way that could ‘dump’ more sick Americans than ever before. That ObamaCare an attractive target for repeal. This article appeared in the May 2010 issue of Diplomat Magazine.

Chapter 21 Bad Medicine: A Guide to the Real Costs and Consequences of the New Health Care Law by Michael D. Tanner Cato Institute White Paper (February 14, 2011)

Introduction On March 21, 2010, in an extraordinary Sunday night session, the House of Representatives gave final approval to President Obama’s long-sought health insurance plan in a partisan 219–212 vote. 1 The bill had earlier passed the Senate on Christmas Eve 2009. Not a single Republican in either chamber voted for the bill. Four days later, the Senate, using a parliamentary tactic known as reconciliation to avoid a Republican filibuster, gave final approval to a package of changes designed to “fix” the bill.2 More than 2,500 pages and 500,000 words long,3 the Patient Protection and Affordable Care Act represents the most significant transformation of the American health care system since Medicare and Medicaid. It will fundamentally change nearly every aspect of health care from insurance to the final delivery of care. The final legislation was in some ways, an improvement over earlier versions. It was not the singlepayer system sought by many liberals. Nor did it include the interim step of a so-called “public option” that would likely have led to a single-payer system in the long run.4 The employer mandate is far less onerous than the 8 percent payroll tax once championed by the House.5 And a proposed income tax surtax on the wealthy was dropped.6 But that does not mean that this is, as the president has claimed, a “moderate” bill. It mandates that every American purchase a government-designed insurance package, while fundamentally reordering the insurance market and turning insurers into something resembling public utilities, privately owned while their operations are substantially regulated and circumscribed by Washington. Insurance coverage will be extended to millions more Americans as government subsidies are expanded deep into the middle class. Costs will be shifted between groups, though ultimately not reduced. And a new entitlement will be created, with the threat of higher taxes and new debt for future generations. In many ways, it has rewritten the relationship between the government and the people, moving this country closer to European-style social democracy. The legislation remains deeply unpopular. Recent polls show substantial majorities support repealing it. For example, a Rasmussen poll in late January of this year showed 58 percent of likely voters supported repeal, with just 38 percent opposed. Similarly, a mid-January Fox News poll showed registered voters favoring repeal by 17 percent. In fact, with the exception of a New York Times /CBS News poll of “all Americans,” recent polling has consistently shown that most voters support repeal

(Figure 1). Republicans ran on a platform of “repeal” or “repeal and replace” during the 2010 midterm elections, and surveys suggest that opposition to the health care law was an important reason that they recaptured the House and gained six Senate seats. On health care, exit polls showed that at least half of voters wanted to repeal Obamacare. This represented an almost unprecedented level of opposition for a major entitlement expansion. Given that exit polls have a history of over-sampling Democratic voters, an even better measure might be an election-night Rasmussen telephone poll that found 59 percent of voters in favor of repeal.7 A Kaiser Foundation survey of voters found similar results: 56 percent of midterm voters said they wanted to see some or all of the law repealed. 8 Another post-election survey found that 45 percent saw their vote as a specific message of opposition to the health care bill.9 The new Republican majority in the House has already begun efforts to undo the health care law. On January 18, 2011, the House voted 245 to 189 to repeal it. 10 While repeal is all but impossible in the short term, given Democratic control of the Senate and a presidential veto, Republicans plan a continued assault on the law, ranging from attempts to repeal some of the most unpopular provisions to plans for de-funding implementation.11 Meanwhile, outside of Washington, opposition remains active. Seven states—Arizona, Idaho, Louisiana, Missouri, Oklahoma, Utah, and Virginia—have passed variations of the

Health Care Freedom Act prohibiting mandatory health insurance. 12 Similar legislation has been introduced in nearly all remaining states. State governments have also been slow to cooperate with federal

efforts to implement the law. For example 23 states refused to set up a high-risk pool in response to the law, and several states are considering a refusal to establish exchanges. Numerous court challenges have also been filed, raising questions about the constitutionality of various aspects of the legislation, especially its individual mandate.13 Plaintiffs include 28 states, as well as individuals, business groups, and others.14 To date, the outcome of those suits has been mixed. In two minor lawsuits in Michigan and Virginia, courts have upheld the mandate. 15 However, in the two most closely watched—and extensively argued—cases, federal judges struck down the mandate, and while the judge in the Virginia case allowed other portions of the law to go forward, the judge in Florida ruled that the lack of a severability clause made the entire law unconstitutional.16 All the cases will be appealed and the final decision will be made by the U.S. Supreme Court. It seems almost certain, therefore, that the debate over health care reform will be with us for some time to come. In the meantime, the legislation has spawned enormous confusion. Insurance companies report people calling and asking, “Where do we get the free Obamacare, and how do I sign up for that?”17 But for good or ill, those expecting immediate change are likely to be disappointed. Most of the major provisions of the legislation are phased in quite slowly. The most heavily debated aspects, mandates, subsidies, and even most of the insurance reforms don’t begin until 2014 or later. Former House Speaker Nancy Pelosi once famously told us: “We have to pass the bill so you can find out what’s in it.”18 A year after passage, we are indeed discovering what is in it. And what we are finding increasingly looks like it will leave Americans less healthy, less prosperous, and less free.

Individual and Employer Mandates Perhaps the single most important aspect of the law is its individual mandate, a legal requirement that every American obtain health insurance coverage that meets the government’s definition of “minimum essential coverage.” Those who don’t receive such coverage through government programs, their employer, or some other group would be required to purchase individual coverage on their own.19 This individual mandate is unprecedented in U.S. governance. Back in 1993, when the Clinton health care plan was under consideration, the Congressional Budget Office noted: “A mandate requiring all individuals to purchase health insurance would be an unprecedented federal action. The government has never required people to buy any good or service as a condition of lawful residence in the United States.”20 Moreover, the individual mandate raises serious constitutional questions. 21 Even the Congressional Research Service was not able to conclude it was constitutional!22 Under the law, beginning in 2014, those who failed to obtain insurance would be subject to a tax penalty. That penalty would be quite mild at first, either $95 or one percent of annual income in 2014, whichever is greater. 23 But it ramps up quickly after that, the greater of $325 or 2 percent of annual income in 2015, and the greater of $695 or 2.5 percent of annual income after that. In calculating the total penalty for an uninsured family, children count as half an adult, which means that in 2016 an uninsured family of four would face a minimum penalty of $2,085 ($695+$695+$347.50+$347.50), pro-rated on the basis of the number of months that the person was uninsured over the course of the year. 24 Individuals will be exempt from the penalties if they earn less than an income threshold to be determined by the secretary of Health and Human Services (but presumed to be roughly the poverty level), or if they are unable to obtain insurance that costs less than 8 percent of their gross incomes.25 According to the CBO, roughly four million Americans will be hit by penalties in 2016, with the penalties averaging slightly more than $1,000.26 In fact, the federal government expects to raise $17 billion from penalties by 2019.27 Simply having insurance, however, is not necessarily enough to satisfy the mandate. To qualify, insurance would have to meet certain government-defined standards for “minimum essential coverage.” For example, in order to qualify, plans would be required to cover ambulatory patient services, emergency services, hospitalization; maternity and newborn care, mental health and substance abuse treatment; prescription drugs; rehabilitative and habitative services; laboratory services; preventative services; wellness services; chronic disease management; pediatric services; and dental and vision care for children.28 The secretary of HHS is given the authority to define the meaning of those terms and ultimately to set the minimum benefits package.29 That process is ongoing, as an Institute of Medicine committee considers whether to mandate the inclusion of benefits such as autism treatment or in vitro fertilization.30 In addition, plans must meet the new insurance regulatory requirements below. Unlike previous versions of the bill, however, individuals who currently have insurance are grandfathered in, meaning they will not have to change their current insurance to meet the new minimum benefit.31 They will even be able add a spouse or children to the plan without changing. While clearly an improvement over earlier versions, this does not necessarily mean that people will be able to keep their current plan. In particular, making changes to their current plan will end the plan’s grandfathered status,

and would require that individuals bring their plan into compliance with the full range of federal mandates and requirements, even if those additional mandates make the new plan more expensive or include benefits that the individual does not want. What changes meet the threshold to end grandfathered status will be determined by the secretary of HHS.32 Regardless of what federal regulators eventually decide, the grandfathering of current plans may be short-lived. That is because, aside from spouses and children, insurers will not be able to continue enrolling new customers in the noncomplying plans. As a result, insurers may stop offering these plans. Over time, the vast majority of noncomplying plans will simply fade away. There has been some dispute over the government’s ability to enforce the mandate. While the law imposes penalties for failure to comply and authorizes the IRS to collect those penalties (indeed, the IRS is expected to hire as many as 11,800 additional agents, auditors, and examiners for enforcement) 33 it does not contain any criminal penalties for failing to comply, and it forbids the use of liens or levies to collect the penalties. However, the IRS is nothing if not resourceful. Already, IRS deputy commissioner Steven Miller has said that the IRS may withhold tax refunds to individuals who fail to comply with the mandate.34 And, because money is fungible, the IRS could simply apply part of your regular tax payments toward the mandate penalty, and then penalize you for failing to pay those regular taxes in full. Interestingly, the law may have created the worst of both worlds, a mandate that is costly and violates individual liberty, but one that is still weak enough that it may be cheaper for many individuals to pay the penalty than to purchase insurance. As a result it may fall far short of its proponents’ goal of bringing young and healthy individuals, who today frequently forego insurance, into the insurance pool. The Congressional Budget Office, in fact, estimates that the penalties from individuals failing to comply with the mandate will generate $17 billion between 2014 and 2019.35 And according to a RAND Corporation study, those remaining uninsured after implementation are likely to be younger and healthier as a group than today’s uninsured.36 Massachusetts’s experience with an individual mandate yielded just such a result. Slightly more than 35 percent of that state’s remaining uninsured are between the ages of 18 and 25, and more than 60 percent are under the age of 35.37 Before the mandate, those between the ages of 18 and 25 made up roughly 30 percent of the uninsured, suggesting that the young (and presumably healthier) are less likely to comply with the mandate.38 Indeed, evidence suggests that Massachusetts residents are increasingly “gaming” the system: purchasing insurance when they know they are going to use health care services, then dropping it when they no longer need it. In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and ran up claims of more than $1,000 per month while in the plan. Their medical spending while insured was more than four times the average for consumers who buy coverage on their own and retain it in a normal fashion.39 Given that the penalties under the Massachusetts mandate are actually stronger than those under the Patient Protection and Affordable Care Act, this does not bode well for the national plan.40 The law also contains an employer mandate. Beginning in 2014, if a company with 50 or more fulltime employees (or the equivalent41 ) does not provide health insurance to its workers, and as a result even a single worker qualifies for a subsidy to help purchase insurance through the exchange (see below), the company must pay a tax penalty of $2,000 for every person they employ full time (minus 30

workers). Thus a company employing 100 workers would be assessed a penalty of $2,000 x 70 workers.42 CBO estimates that those penalties will cost businesses $52 billion from 2014 to 2019.43 Even more than the individual mandate, the employer mandate may affect people who already have health insurance coverage. In part, this would be because far more people receive their insurance through work. But, in addition, HHS has released rules suggesting that if companies make any significant changes to their current coverage they will no longer be “grandfathered” under the employer mandate, meaning that they will have to bring their plan into full compliance with all the new federal requirements. Among the changes that would end “grandfathered” protection would be a change in insurance carrier, changes in or the elimination of any currently covered benefit, decreases in the employer’s contribution rate, increases in annual payment limits, and increases in employee cost-sharing, including any increase in deductibles or copayments.44 An internal study by HHS estimates that more than two-thirds of companies could be forced to change their current coverage. For small businesses, the total could reach 80 percent.45 Even offering the correct benefits will not necessarily exempt companies from penalties. Companies that offer coverage, but which have employees who still qualify for a subsidy because the employee’s contribution is deemed unaffordable (that is, it exceeds 8 percent of an employee’s income), will still have to pay a penalty of the lesser of $3,000 per employee receiving a subsidy or $2,000 per worker whether they are receiving subsidy or not. A survey by the employer benefits firm, Mercer, suggests that as many as one-third of employers could face penalties for failing to meet the affordable insurance requirement.46 Such a mandate is simply a disguised tax on employment. As Princeton University professor Uwe Reinhardt, the dean of health care economists, points out, “[Just because] the fiscal flows triggered by the mandate would not flow directly through the public budgets does not detract from the measure’s status of a bona fide tax.”47 And while it might be politically appealing to claim that business will bear the new tax burden, nearly all economists see it quite differently. The amount of compensation a worker receives is a function of his or her productivity. The employer is generally indifferent to the composition of that compensation. It can be in the form of wages, benefits, or taxes. What really matters is the total cost of hiring that worker. Mandating an increase in the cost of hiring a worker by adding a new payroll tax does nothing to increase that worker’s productivity. Employers will therefore seek ways to offset the added cost by raising prices (the least likely solution in a competitive market), lowering wages, reducing future wage increases, reducing other benefits (such as pensions), cutting back on hiring, laying off current workers, shifting workers from full-time to part-time, or outsourcing.48 In fact, a survey by Towers Watson shows that employers are preparing to take exactly those steps.49 And, as with the individual mandate, the penalty may be low enough that many businesses may find it less costly to “pay” than to “play.”50 As an internal document prepared for Verizon explains “Even though the proposed assessments [on companies that do not provide health care] are material, they are modest when compared to the average cost of health care.”51 In fact, CBO estimates that at least 10 to 12 million workers could lose their current employer-provided health insurance.52 Approximately 8 to 9 million could end up on Medicaid, with the rest purchasing subsidized coverage through the exchanges (see below).53 But this may vastly underestimate the actual number of workers who could be dumped

from their current coverage, as several large U.S. corporations have indicated that they may drop their current coverage.54

Insurance Regulations Since the advent of the McCarran-Fergusson Act in 1945, health insurance has been primarily regulated at the state level.55 The Patient Protection and Affordable Care Act imposes a host of new federal insurance regulations that will significantly change the way the health insurance industry does business. Some of these regulatory changes are likely to be among the law’s most initially popular provisions. But many are likely to have unintended consequences. Perhaps the most frequently discussed regulatory measure is the ban on insurers denying coverage because of preexisting conditions. Throughout the health care debate, proponents of reform highlighted stories of people with terrible illnesses who were unable to get insurance coverage.56 Under the Patient Protection and Affordable Care Act insurers would be prohibited from making any underwriting decisions based on health status, mental or physical medical conditions, claims experience, medical history, genetic information, disability, other evidence of insurability, or other factors to be determined later by the secretary of HHS.57 Specifically, the law would require insurers to “accept every employer and individual . . . that applies for such coverage.”58 Insurers are also forbidden to cancel insurance if a policyholder becomes sick.59 Finally, there will be limits on the ability of insurers to vary premiums on the basis of an individual’s health. That is, insurers must charge the same premium for someone who is sick as for someone who is in perfect health.60 Insurers may consider age in setting premiums, but those premiums cannot be more than three times higher for their oldest than their youngest customers.61 Smokers may also be charged up to 50 percent more than nonsmokers.62 The only other factors that insurers may consider in setting premiums are geographic location and whether the policy is for an individual or a family.63 It is also worth noting that, while a ban on preexisting conditions for children started last year, the rules will not apply to adults until 2014.64 Until then, adults with preexisting conditions will be eligible to participate in federally sponsored high-risk pools.65 The high-risk pools will contract with private, nonprofit insurers for plans that must cover at least 65 percent of the costs of participants’ care. Out-ofpocket costs would be capped at $5,950 a year for an individual or $11,900 for a family. The risk pools were supposed to be in place no later than the end of June 2010, but there have been numerous delays.66 As many as 23 states have declined to establish the pools, forcing the federal government to set them up in those states. So far, very few people have enrolled in the risk polls. In fact, by the end of 2010, only 8,011 people had signed up nationwide.67 One reason may be that premiums within the pools are relatively high. For example, the premium for a non-smoking 45–54 year old ranges from $330 per month in Hawaii to $729 per month in North Carolina.68 However, a bigger problem may be the structure of the program, which is incompatible with existing state high-risk pools.69 Individuals currently insured through their state risk pool must drop out of that pool, remain uninsured for six months, then join the federal pool. It’s not surprising that that has not been a popular option. While the ban on medical underwriting may make health insurance more available and affordable for those with preexisting conditions and reduce premiums for older and sicker individuals, it will increase premiums for younger and healthier individuals. The RAND Corporation recently conducted a study for

the Associated Press concluding that premiums for the young would rise about 17 percent, roughly $500 per year, as a result of the new law. 70 Other studies suggest that the increase could be much higher. For example, a study by the independent actuarial firm Millman, Inc., concluded that premiums for young men could increase by 10 to as much as 30 percent.71 The Council for Affordable Health Insurance suggests that premiums for some individuals could increase by 75 to 95 percent in states that do not now have guaranteed issue or community rating requirements (see Figure 2).72 Moreover, the ban may not be as effective as proponents hope in making insurance available to those with preexisting conditions. Insurance companies have a variety of mechanisms for evading such restrictions. A simple example is for insurers to focus their advertising on young healthy people, or they can locate their offices on the top floor of a building with no elevator or provide free health club memberships while failing to include any oncologists in their network. Even the ban on excluding preexisting conditions for children has already had unintended consequences. Several large insurers have stopped offering “child only” insurance plans, thereby depriving thousands of parents of a low-cost insurance option.73 In a similar vein, the law also bans “rescissions,” or the practice of insurers dropping coverage for individuals who become sick.74 Under existing practices, insurers sometimes retroactively review an individual’s initial insurance application and cancel the policy if the application is found to be inaccurate.75 Because insurers would undertake such a review only when individuals submitted large claims (and were therefore sick) and the grounds for rescission often appeared to be very minor discrepancies, the practice was widely condemned by the bill’s proponents. Under the legislation, insurers could cancel coverage only in cases of fraud or intentional misrepresentation of material fact. While likely to be very popular, this provision may have little practical impact. According to a congressional report, there are actually fewer than 5,000 rescissions per year, and at least some of those were cases of actual fraud where cancellations would still be allowed under this legislation.76

A second new insurance regulation would prohibit insurers from imposing lifetime limits on benefit payouts.77 Although popular, this provision is also likely to have less impact than most people believe. Roughly 40 percent of insured Americans already had policies with no lifetime caps. For those policies that did have a cap on lifetime benefits, that cap was usually somewhere between $2.5 and 5 million, with many running as high as $8 million, amounts that very few people ever reached.78 Still, some individuals with chronic or catastrophic conditions will undoubtedly benefit from this provision, although there are no solid estimates on how many. Removing lifetime caps will most likely increase the cost of reinsuring policies, leading ultimately to higher premiums, but most insurers predict the increase will be modest.79 This regulation, however, may have a much bigger impact on more than one million part-time, seasonal, and low-wage workers who currently take advantage of low-cost, limited benefit plans. Those plans, known in the industry as “mini-med” plans, have inexpensive premiums because they can, among other things, restrict the number of covered doctor visits or impose a maximum on insurance payouts in a year. They are particularly popular with low-wage workers in the restaurant and retail industries. The prohibition on lifetime caps could all but eliminate these plans, meaning that as many as a million workers could lose the coverage they have now. Some could be forced into Medicaid, while others would be forced to purchase much more expensive insurance than they have today.80 In fact, the administration has already been forced to issue more than 728 waivers as of February 2011, allowing some employers to continue offering mini-med plans. 81 These include large employers

such as McDonald’s, which had threatened to drop coverage for most of its workforce in the absence of an exemption.82 Several unions, including at least three locals of the Service Employees International union, 17 Teamsters chapters, 28 affiliates of the United Food and Commercial Workers Union, several locals of the Communications Workers of America, and chapters of the American Federation of Teachers have received waivers as well.83 However, at least 50 companies have had their requests for waivers denied. (The administration will not divulge the names of those companies.)84 The law also places limits on deductibles. Employer plans may not have an annual deductible higher than $2,000. Family policies are limited to deductibles of $4,000 or less.85 There is an exception, however, for individuals under the age of 30, who will be allowed to purchase a catastrophic policy with a deductible of $4,000 for an individual, $8,000 for a family.86 In addition, the law requires insurers to maintain a medical loss-ration (that is the ratio of benefits paid to premiums collected) of at least 85 percent for large groups and 80 percent for small groups and individuals.87 Insurance companies that pay out benefits less than the required proportion of the premium, must rebate the difference to policy holders on an annual basis beginning in 2011. 88 This requirement is intended to force insurers to become more efficient by reducing the amount of premiums that can be used for administrative expenses (and insurer profits).89 However, while there is undoubtedly waste in insurance overhead, such a rigid cap may create a number of unintended consequences. Insurance overhead includes many useful services and programs. These include efforts to monitor patient care to ensure that those with chronic medical conditions are getting appropriate care, exactly the type of program that President Obama says he wants to encourage, and efforts to combat fraud and abuse. Those programs can actually reduce overall costs and result in lower insurance premiums. Forcing insurers to abandon those efforts could have the perverse effect of increasing costs to consumers.90 Finally, the legislation would also allow parents to keep their dependent children on their policies until the child reaches age 27. This too is generally considered a popular aspect of the new law, but it does come with a price tag. HHS estimates that every dependent added to a policy will increase premiums by $3,380 per year.91 And employers have indicated that they are reluctant to add dependent children to the coverage they provide, even if insurers offer it, meaning parents will have to pay most or all of the additional cost.92 The new insurance regulations may result in many insurers withdrawing from their less profitable markets, leaving many consumers with few insurance choices. Already, Principal Financial has stopped selling health insurance, which has resulted in coverage being dropped for some 840,000 people.93 And Aetna has announced that it is pulling out of the individual market in Colorado.94 Perversely, the Patient Protection and Affordable Care Act could reduce competition in the insurance market. Overall, most of the law’s insurance reforms have been among the more politically popular aspects of the new law, but they are likely to have only a minor impact and may, indeed, have a number of unintended consequences.

Subsidies The number one reason that people give for not purchasing insurance is that they cannot afford it.95 Therefore, the legislation’s principal mechanism for expanding coverage (aside from the individual and employer mandates) is to pay for it, either through government-run programs such as Medicaid and the State Children’s Health Insurance Program (SCHIP) or through subsidizing the purchase of private health insurance. Starting this year, states are required to expand their Medicaid programs to cover all U.S. citizens with incomes below 133 percent of the poverty level ($14,404 for an individual; $29,327 for a family of four; higher in Alaska, Hawaii, and the District of Columbia).96 Previously, only pregnant women and children under age six were covered to 133 percent of the poverty level. Children 6–18 were required to be covered up to 100 percent of the poverty level, though 18 states covered children from families with higher incomes. In fact a few states covered pregnant women and children under age 1 up to 185 percent of the poverty level.97 Most other low-income children were covered through SCHIP (up to 250 percent of poverty). Thus, the primary result of the law’s Medicaid expansion would be to extend coverage to the parents in low-income families and to childless adults. In particular, single, childless men will now be eligible for Medicaid. This raises potentially serious concerns. Low-income, childless, adult men in particular are a high-risk, high-cost health care population. That means costs may run higher than expected, a problem that may be exacerbated by adverse selection within that population. Tennessee’s experience with TennCare provides a cautionary tale. In 1994, Tennessee expanded Medicaid eligibility to uninsured citizens who weren’t able to get health insurance through their employers or existing government programs and to citizens who were uninsurable because of pre-existing conditions. Over the next 10 years, Medicaid costs in the other 49 states rose by 71 percent. In Tennessee they increased by an overwhelming 149 percent. 98 Despite this massive increase in spending, health outcomes did not improve. Even the state’s Democratic governor Phil Bredesen called the program “a disaster.”99 Similar problems with the Patient Protection and Affordable Care Act’s Medicaid expansion could dramatically drive up costs for both the federal and state governments. Initially, the federal government will pay 100 percent of the cost for new enrollees. However, beginning in 2017, states will be required to pick up a portion of the cost. The impact on state budgets would very dramatically. Those states like California, whose eligibility standards already are close to the new federal requirements and are therefore unlikely to see large enrollment increases, will see only modest cost increases. In the case of California, Medicaid costs would go up only about 4.5 percentage points higher than they would have risen in the absence of PPACA’s requirements, or about $11.7 billion between 2014 and 2023. But other states would see far bigger increases. Texas, for example, would receive the largest percentage hit, being forced to absorb an increase 20 percentage points higher than it otherwise would have, a cost of $30.5 billion from 2014 to 2023. New York would see the largest cost increase in dollars, $65.5 billion over those 10 years, largely because of its already high cost per enrollee.100 It is important to remember that these are costs over and above already rising Medicaid costs. Arizona has already requested a waiver exempting the state’s Medicaid program from the law’s “maintenance of effort” requirement. That provision prohibits states from changing their current

eligibility levels, but Arizona is seeking to drop 280,000 people from the program in order to help close the state’s budget deficit. Several other states may follow suit.101 SCHIP would be continued until September 30, 2019. Between 2014 and 2019, the federal government will increase its contribution to the program, raising the federal match rate by 23 percentage points (subject to a 100 percent cap).102 States must maintain their current income eligibility levels for the program.103 Individuals with incomes too high to qualify for Medicaid but below 400 percent of the poverty level ($88,000 per year) will be eligible for subsidies to assist their purchase of private health insurance. These subsidies, which will be provided in the form of refundable tax credits, are expected to total more than $457 billion between 2014, when individuals are first eligible for the payments, and 2020.104 There are actually two separate credits designed to work more or less in conjunction with one another. The first is a “premium tax credit.”105 The credit is calculated on a sliding scale according to income in such a way as to limit the total proportion of income that an individual would have to pay for insurance.106 Thus, individuals with incomes between 133 and 200 percent of the poverty level will receive a credit covering the cost of premiums up to four percent of their income, while those earning 300–400 percent of the poverty level will receive a credit for costs in excess of 9.5 percent of their income. The second credit, a “cost-sharing credit” provides a subsidy for a proportion of out-of-pocket costs, such as deductibles and co-payments. Those subsidies are also provided on a sliding income-based scale, so that those with incomes below 150 percent of the poverty level receive a credit that effectively reduces their maximum out-of-pocket costs to 6 percent of a plan’s actuarial value, while those with incomes between 250 and 400 percent of the poverty level would, after receiving the credit, have maximum out-of-pocket costs of no more than 30 percent of a plan’s actuarial value. As with many tax credits, the phase-out of these benefits creates a high marginal tax penalty as wages increase. In some cases, workers who increase their wages could actually see their after-tax income decline as the subsidies are reduced. This creates a perverse set of incentives that can act as a “poverty trap” for low-wage workers.107 In addition to the individual subsidies, there will also be new government subsidies for some small businesses. Beginning this year, businesses with fewer than 25 employees and average wages below $50,000 are eligible for a tax credit to help offset the cost of providing insurance to their workers.108 To be eligible, employers must provide insurance to all full-time workers and pay at least 50 percent of the cost of that coverage. The actual amount of the credit depends on the size of the employer and the average worker salary. Between 2011 and 2014, when the exchanges begin operation (see below), employers with 10 or fewer workers and an average wage below $25,000 per year would be eligible for a credit equal to 35 percent of the employer’s contribution. For a typical family policy, the credit would be around $2,000. The credit gradually phases out as the size of the company and average wages increase. Once the exchanges are operational after 2014, businesses with 10 or fewer employees and average wages below $25,000 that purchase their insurance through the exchange will be eligible for a credit of up to 50 percent of the employer’s contribution toward a worker’s insurance. Again, the credit is phased out as the size of the company and average wages increase. The credit can only be claimed for two years. In addition, the legislation establishes a $5 billion temporary reinsurance program for employers who

provide health insurance coverage for retirees over age 55 who are not yet eligible for Medicare.109 The program will reimburse insurers for 80 percent of retiree claims between $15,000 and $90,000.110 Insurers are required to pass those savings on to employers through lower premiums, though how that will be enforced remains a question.111 The law also increases funding for community health centers by $11 billion. 112 Approximately $1.5 billion would be used for the construction of new health centers in inner-city or rural low-income communities, with the remainder designed to subsidize operations for existing centers. Community health centers are expected to treat nearly 40 million patients by 2015, nearly double today’s utilization.113 All together, this law represents a massive increase in the welfare state, adding millions of Americans to the roll of those dependent, at least to some extent, on government largess. Yet for all the new spending, the Patient Protection and Affordable Care Act falls short of its goal of achieving universal coverage (see below).

The Exchanges Perhaps the most fundamental reordering of the current insurance market is the creation of “exchanges” in each state. Ezra Klein, one of the bill’s most prominent liberal supporters, maintains that that the exchanges are “the most important element in the plan.”114 The exchanges would function as a clearinghouse, a sort of wholesaler or middleman, matching customers with providers and products. Exchanges would also allow individuals and workers in small companies to take advantage of the economies of scale, both in terms of administration and risk pooling, which are currently enjoyed by large employers. The larger risk pools should theoretically reduce premiums, as would the exchanges’ ability to “use market share to bargain down the prices of services.”115 However, one should be skeptical of claims that the exchange will reduce premiums. In Massachusetts, supporters of the “Connector” claimed that it would reduce premiums for individual insurance policies by 25 to 40 percent.116 Instead, premiums for policies sold through the Connector have been rising, up 11 percent for the lowest cost plans since the program began.117 Beginning in 2014, one or more exchanges would be set up by each state and largely operated according to rules developed by that state. States would also have the option of joining with other states and creating regional exchanges. If a state refuses to create an exchange, the federal government is empowered to set one up within that state.118 States are given considerable discretion over how the exchanges would operate, but some of the federal requirements are significant. Exchanges may be either a governmental agency or a private nonprofit entity. 119 And states would have the option of either maintaining separate insurance pools for the individual and small-group markets or of combining them into a single pool.120 The pools would also include individual or small-group policies sold outside the exchange.121 Existing plans could not be included in those pools, however.122 Initially, only businesses with fewer than 50 employees, uninsured individuals, or the self-employed may purchase insurance through the exchange. Members of Congress and senior congressional staff are also required to purchase their insurance through the exchange.123 However, beginning in 2017, states have the option of opening the exchange to large employers.124 Insurance plans offered for sale within the exchanges would be grouped into four categories based on actuarial value: bronze, the lowest cost plans, providing 60 percent of the actuarial value of a standard plan as defined by the secretary of HHS; silver, providing 70 percent of the actuarial value; gold, providing 80 percent of the actuarial value; and platinum, providing 90 percent of the actuarial value.125 In addition, exchanges may offer a special catastrophic plan to individuals who are under age 30 or who have incomes low enough to exempt them from the individual mandate.126 For all categories of plans, out-of-pocket expenses would be limited according to the income of the purchaser. For individuals and families with incomes above 400 percent of the poverty level, out-ofpocket expenses would be limited to $5,950 for individuals and $11,900 for families, approximately the current limits for a health savings account (HSA). Those limits would also apply to those who purchase the catastrophic plan. Individuals with incomes between 300 and 400 percent of the poverty level would have out-of-pocket expenses limited to two-thirds of the HSA limits ($3,987/individual and $7,973/family); 200 to 300 percent of poverty would have out-of-pocket expenses limited to one-half of the HSA limits ($2,975/individual and $5,950/family); and those with incomes below 200 percent of

poverty would have out-of-pocket expenses limited to one-third of the HSA limits ($1,983 per individual and $3,967 per family).127 The reductions in out-of-pocket expenses would occur within the plan in such a way as to not change their overall actuarial value. CBO estimates that premiums for bronze plans would probably average between $4,500 and $5,000 for an individual and between $12,000 and $12,500 for family policies.128 The more inclusive policies would have correspondingly higher premiums. Plans offered through the exchange must meet the federal requirements for minimum benefits. State mandated benefits are not preempted, meaning that states may continue to impose additional mandates (though states must pay for the cost of the additional mandates in subsidized policies.)129 In addition to the state insurance plans, the legislation authorizes the federal Office of Personnel Management to contract with private insurers to ensure that each state exchange offers at least two multi-state insurance plans. These multi-state plans are supposed to resemble the Federal Employee Health Benefit Plan, but will operate separately from the FEHBP and will have a separate risk pool. 130 The multi-state plans must meet the licensing and regulatory requirements of each state in which they are offered.131 At least one plan must not include abortion coverage, and one must be offered by a nonprofit insurer. The legislation also provides start-up funds for states to establish health insurance cooperatives, which may participate in the state’s exchange.132 Exactly how significant the exchanges will prove to be remains to be seen. At the very least exchanges will change the way individuals and small businesses purchase health insurance. However, if expanded to include large businesses or their employees, exchanges represent a potential framework for a far more extensive government intervention in the insurance market.

Impact on Consumer Directed Health Plans The health care bill reverses much of the progress in recent years toward more consumer-directed health care. Consumer-directed health care is a broad term used to describe a variety of insurance arrangements, including health savings accounts, flexible spending accounts (FSAs), and health reimbursement accounts (HRAs), based on the concept that patients (“consumers”) should have more control over the utilization of their health care dollars.133 The goal is to simultaneously control costs and improve quality by creating incentives for consumers to make judgments based on price and value; in short to purchase health care the way we buy other goods and services.134 More than 46 million workers currently participate in consumer-directed health plans (see Figure 3).

President Obama has always been hostile to consumer-directed health care. In his book, The Audacity of Hope, for example, he dismisses health savings accounts as being based on the idea that people have “an irrational desire to purchase more than they need.”135 That hostility is reflected in the final legislative language. Notably, the legislation puts substantial new restrictions on such consumer-oriented innovations as HSAs and FSAs. Roughly 10 million Americans currently have health savings accounts. 136 Nothing in the legislation directly prohibits them. However, the law does add several new restrictions. For example, the tax penalty for HSA withdrawals that are not used for qualified medical expenses will be doubled from the current 10 percent to 20 percent, starting this year. 137 In addition, the definition of “qualified medical

expense” has been made more restrictive. Among other things, over-the-counter medications are no longer considered a “qualified medical expense.”138 Of greater concern is the potential impact of the law on high-deductible insurance plans. Current law requires that an HSA be accompanied by such a policy. However, many of the insurance regulations discussed above raise questions about whether or not high-deductible plans will remain viable. For example, the lowest permissible actuarial value for an insurance plan (the bronze plan) would be 60 percent.139 It is unclear whether a plan’s actuarial value would include employer or individual contributions made to the individual’s HSA. That decision is left to the discretion of the Secretary of HHS.140 Whether or not HSA contributions are included can make as much as a 10–20 percent difference in a plan’s actuarial value. As a result, if the contributions are not included, many, if not most, highdeductible plans will not qualify. The fate of HSAs is therefore dependent on a regulatory ruling by the secretary of HHS in an administration avowedly hostile to HSAs. The 80 percent minimum medical loss ratio required of insurance plans could also prove problematic for HSAs. Again, how this provision will work in practice will depend on rules to be developed by the secretary of HHS. But, the legislation makes no distinction between traditional and high-deductible insurance plans. Few if any current high-deductible policies meet this requirement. In addition, there is reason to wonder whether high-deductible insurance plans will likely be able to meet the law’s requirement that insurance plans provide first-dollar coverage for all “preventive services.”141 Currently, most high-deductible plans do cover preventive services as defined by the IRS. However, as discussed above, under the Patient Protection and Affordable Care Act, preventive services will be defined by the U.S. Preventative Services Task Force and, once again, the secretary of HHS. 142 If the new definition of preventive services is more expansive than the IRS definition, as seems likely, most current high-deductible plans will once again be out of compliance. Finally, insurers must make certain that their high-deductible plans are designed so as to comply with the law’s limits on out-of-pocket expenses. In theory, a high-deductible plan designed to work with health savings accounts could meet all the new requirements. But industry sources warn that a plan designed to those specifications would offer few if any advantages over traditional insurance and would not be competitive in today’s markets. As a result, insurers may stop offering highdeductible policies.143 And since the rules for HSAs require that they be accompanied by a high-deductible plan, the result would be to end HSAs. The law also includes new limits on FSAs, which are currently used by as many as 30 million Americans.144 Starting this year, the maximum tax-exempt contribution to an FSA was cut in half, from $5,000 annually to just $2,500. 145 The new definition of “qualified medical expense” will also be applied to FSAs, meaning that as with HSAs, FSAs can no longer be used to pay for over-the-counter medications.146 The impact of these provisions extends well beyond their impact on workers who currently take advantage of such innovative products as HSAs and FSAs. More significantly, the assault on these products represents a fundamental philosophical shift in the health care debate. Through this legislation, the president and democrats in Congress reject consumer-oriented health care reform in clear favor of government control.

Medicare Cuts Despite denials from the Obama administration and Democrats in Congress, the legislation does cut Medicare—and it should. Medicare is facing unfunded liabilities of $50 to $100 trillion depending on the accounting measure used, making future benefit cuts both inevitable and desirable.147 Of course it would have been better if the savings from any cuts had been used to reduce the program’s future obligations rather than to fund a brand new entitlement program. And, clearly, not all Medicare cuts are created equal.148 Still, that should not obscure the necessity for dealing with Medicare’s looming financial crisis (see Figure 4).

The legislation anticipates a net reduction in Medicare spending of $416.5 billion over 10 years.149 Total cuts would actually amount to slightly more than $459 billion, but since the bill would also increase spending under the Medicare Part D prescription drug program by $42.6 billion, the actual savings would be somewhat less.150 The key word here is “anticipates,” because several of those cuts are speculative at best. For example, the bill anticipates a 23 percent reduction in Medicare fee-for-service reimbursement payments to providers.151 But Medicare has been slated to make reductions to those payments since 2003, yet each year Congress has voted to defer the cuts. There is no reason to believe that Congress is now more likely to follow through on such cuts. In fact, in a perfect exercise in cynicism, the House has already passed separate legislation to repeal them. More likely, but still problematic, are $136 billion in cuts to the Medicare Advantage program. Currently, some 10.2 million seniors, 22 percent of all Medicare recipients, are enrolled in the Medicare Advantage program, which allows Medicare recipients to receive their coverage through private insurance

plans.152 The bill would change the way payments are calculated for Medicare Advantage. Currently Medicare Advantage programs receive payments that average 14 percent more than traditional fee-forservice Medicare,153 something that Democrats have derided as wasteful.154 However, the program also offers benefits not included in traditional Medicare, including preventive-care services, coordinated care for chronic conditions, routine physical examinations, additional hospitalization, skilled nursing facility stays, routine eye and hearing examinations, glasses and hearing aids, and more extensive prescription drug coverage than offered under Medicare Part D.155 The law imposes a new competitive bidding model on the Medicare Advantage program that will effectively end the 14 percent overpayment.156 The change will be phased in over three years beginning in 2012. In response, many insurers are expected to stop participating in the program, while others will increase the premiums they charge seniors. Medicare’s chief actuary estimates more than 7 million seniors could be forced out of their current insurance plan and back into traditional Medicare.157 The Congressional Budget Office predicts these cuts “could lead many plans to limit the benefits they offer, raise their premiums, or withdraw from the program.” Already, Harvard Pilgrim Health Care has dropped its Medicare Advantage program, forcing 22,000 seniors in Massachusetts, New Hampshire, and Maine to seek other coverage.158 Particularly hard hit would be minorities and seniors living in underserved areas. For example, nearly 40 percent of African-American and 54 percent of Latino seniors participate in Medicare Advantage, in part because lower-income seniors see it as a low-cost alternative to Medigap insurance for benefits not included under traditional Medicare.159 Interestingly, the law exempts three counties in south Florida from the Medicare Advantage cuts. In addition, a new “productivity adjustment” would be applied to reimbursements to hospitals, ambulatory service centers, skilled nursing facilities, hospice centers, clinical laboratories, and other providers, resulting in an estimated savings of $196 billion over 10 years.160 There would also be $3 billion in cutbacks in reimbursement for services that the government believes are over-used, such as diagnostic screening and imaging services. And, beginning next year, the “utilization assumption” used to determine Medicare reimbursement rates for high-cost imaging equipment will be increased from 50 to 75 percent, effectively reducing reimbursement for many services.161 This change is expected to reduce total imaging expenditures by as much as $2.3 billion over 10 years.162 Other Medicare cuts include freezing reimbursement rates for home health care and inpatient rehabilitative services and $1 billion in cuts to physician-owned hospitals.163 And, for the first time, the secretary of HHS would be permitted to use comparative effectiveness research in making reimbursement decisions. The use of comparative effectiveness research has been extremely controversial throughout this debate. On the one hand, many health care experts believe that much of U.S. health care spending is wasteful or unnecessary. 164 Medicare spending varies wildly from region to region, without any evidence that the variation is reflected in the health of patients or procedural outcomes.165 A case could certainly be made that taxpayers should not have to subsidize health care that has not proven effective, nor can Medicare and Medicaid pay for every possible treatment regardless of cost-effectiveness. On the other hand, the use of such research in determining what procedures are reimbursed could fundamentally alter the way medicine is practiced and could interpose government bureaucracies in

determining how patients should be treated. Moreover, there are significant questions about whether comparative effectiveness can provide a truly effective basis for determining reimbursement policy.166 In fact, it could be argued that Medicare is particularly unsuited for such a policy.167 Many others worry that the use of comparative effectiveness research for government programs such as Medicare sets the stage for its extension to private medical practice. There is no doubt that national health care systems in other countries use comparative effectiveness research as the basis for rationing.168 Some of President Obama’s health care advisers, such as former senator Tom Daschle have recommended that it be extended to private insurance plans.169 And the president has named as the new director of the Center for Medicare and Medicaid Services Dr. Donald Berwick, who is an outspoken admirer of the British National Health Service, and particularly its National Institute for Clinical Effectiveness, which makes such cost-effectiveness decisions.170 Although some of the cuts described above are problematic, many other proposed cuts in this bill are actually steps in the right direction. For example, the law reduces Medicare Part D subsidies by $10.7 billion for high-income recipients. This means that individuals with incomes over $85,000 and couples with incomes over $170,000 will no longer have their prescription drug purchases subsidized by taxpayers. In addition, the law will eliminate part of a Bush-era subsidy for businesses that includes prescription drug coverage in retiree health plans.171 Since 2006, as part of the Medicare prescription drug program, companies have received a federal subsidy for 28 percent (up to a cap of $1,330 per retiree) of the cost of providing prescription drugs to retired workers.172 Proponents justified the subsidy on the grounds that companies would otherwise dump workers into Medicare, raising the cost of the Part D, prescription drug plan. However, not only do businesses receive the subsidy, they were also allowed to deduct the subsidy from their taxes, receiving what was in effect a second subsidy. In fact, UC Berkeley Economist Brad DeLong estimates that by making the original subsidy tax free, the federal government actually ends up subsidizing 63 percent of the cost of retiree drug benefits for some companies.173 The health care legislation retains the subsidy but eliminates the tax break beginning in 2013.174 This change received a great deal of press attention when it forced several companies, such as Caterpillar, Lockheed Martin, and AT&T, to take charges against earnings on their Securities and Exchange Commission (SEC) filings. Altogether those charges could total more than $4.5 billion, reflecting future tax costs to those companies.175 Democrats reacted to the accounting changes with outrage and threatened hearings on the issue. However, the charges appear to be required under SEC rules, and Democrats later backed down. 176 On the other side, Republicans attempted to score points by warning that the change could reduce economic growth and reduce employment. They have a point in that the money that the companies will now have to pay in taxes is money that cannot be used to expand operations or pay workers. However, not all tax breaks are created equal. This one, in particular, appears to be a highly questionable form of corporate welfare. Finally, the new law establishes a new Independent Payment Advisory Board, which would have the power to recommend changes to the procedures that Medicare will cover, and the criteria to determine when those services would be covered, provided its recommendations “improve the quality of care” or “improve the efficiency of the Medicare program’s operation.”177 Starting in 2013, if Medicare spending

is projected to grow faster than the combined average rate of general inflation and medical inflation (averaged over five years), IPAB must submit recommendations bringing spending back in line with that target. Beginning in 2018, the annual spending target becomes the rate of GDP growth plus 1 percent. Once IPAB makes its recommendations, Congress would have 30 days to vote to overrule them. If Congress does not act, the secretary of HHS would have the authority to implement those recommendations unilaterally. Given Congress’s proven inability to restrain the growth in Medicare spending, an independent commission, and a requirement that Congress vote on the issue, could prove beneficial. Unfortunately, IPAB is prohibited from making any recommendation that would “ration care,” increase revenues, or change benefits, eligibility, or Medicare beneficiary cost-sharing (including Medicare premiums). 178 That leaves IPAB with few options beyond reductions in provider payments. Hospitals and hospices would be exempt from any cuts until 2020.179 Thus, most of the cuts would initially fall on physicians. With Medicare already underreimbursing providers, further such cuts would have severe consequences, including driving physicians from the program and increased cost-shifting to private insurance. Eventually hospitals will also see significant reimbursement cuts. The Centers for Medicare and Medicaid Services estimates that this could cause about 15 percent of hospitals, nursing homes, and home health agencies to close.180 Given the opposition such service cutbacks are likely to engender, it is quite possible that IPAB will end up as neutered as previous attempts to impose fiscal discipline on government health care programs.181 On the other side of the ledger, the legislation increases subsidies under the Medicare Part D prescription drug program. A Medicare recipient enrolled in the standard version of the prescription drug plan currently pays a deductible of $310. Thereafter, Medicare pays 75 percent of costs between $310 and $2,800 in drug spending. The patient will pay the remaining 25 percent of these costs. The patient then encounters the notorious “doughnut hole.” For drug costs above $2,800 but below $4,450 in out-ofpocket spending, the patient must pay 100 percent of the costs. After that, the prescription drug plan kicks in again and pays 95 percent of costs above $4,450.182 The Patient Protection and Affordable Care Act ever so slowly closes this donut hole. In June, seniors enrolled in the program who have drug costs in excess of $2,700 began receiving a $250 check as a partial rebate of their drug costs.183 Starting in 2011, a slow reduction in the amount that seniors have to pay out-of-pocket within the donut hole begins, eventually reducing that amount from the current 100 percent to 25 percent by 2020. Part of the cost of filling the donut hole will be borne by pharmaceutical companies, which will be required to provide a 50 percent discount on the price of brand-name drugs. This provision’s cost to drug companies has been estimated at approximately $42.6 billion. 184 The remaining 25 percent reduction in out-of-pocket costs will come from federal subsidies. For generic drugs, the entire out-of-pocket cost reduction is through subsidies. In considering any of the cuts discussed above, there are three things to keep in mind. First, cuts in Medicare are both necessary and inevitable. However, there will almost certainly be an impact on the quality and availability of care. Second, savings from the cuts will not be used to deal with Medicare’s looming budget shortfalls, but rather to finance the new entitlements under the legislation. Democrats have pointed out that changes under the legislation, combined with new Medicare tax revenue, would extend the life of the Medicare Trust Fund by as much as 12 years. While technically true, this

represents a very misleading double counting of the savings and revenue. And third, there is ample reason to be skeptical about whether the cuts will ever actually occur. Medicare’s actuary warns that the proposed cuts “may be unrealistic.”185 The CBO itself cautions that “it is unclear whether such a reduction in the growth rate of spending could be achieved, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or through reductions in access to care or the quality of care.”186 Congress’s record in this regard is decidedly mixed. As the bill’s proponents point out, it is untrue to say that Congress has never cut Medicare spending. At least 11 times since 1980, Congress has passed Medicare cuts that actually did take place.187 Most were modest reductions in payments to certain types of providers, reductions in “disproportionate share” (DSH) payments to hospitals, or small increases in cost-sharing by seniors, or in Medicare premiums. At least in limited circumstances, Congress has been able to trim Medicare.188 However, Medicare is still facing a $50–100 trillion funding gap, and Congress has proven itself unable to take the steps necessary to deal with this long-term gap. Some of the most significant cuts that have been proposed have later been reduced or repealed. For instance, in 1997, as part of the Balanced Budget Act, Congress established the “sustainable growth rate” (SGR), designed to hold annual increases in Medicare reimbursements to a manageable growth rate. But in 2003, 2005, 2007, 2008, and this year (reaching back to 2009), Congress has overturned provider payment cuts that would have been required by the SGR. A bill before Congress—the infamous “doc fix” (see below)—would permanently eliminate future SGR mandated cuts.189 In some ways the legislation is a victim of Medicare itself. Because the legislation does nothing to reform the program’s unsustainable structure, Congress is caught between two unpalatable choices. If it makes the cuts called for under the legislation, it risks, according to the CBO “reductions in access to care or the quality of care.”190 But if it fails to make those cuts, then the legislation will add a huge new cost to an already exploding debt. That is a recipe for legislative paralysis.

Taxes The Patient Protection and Affordable Care Act imposes more than $569 billion in new or increased taxes over the first 10 years.191 These include Tax on “Cadillac” Insurance Plans. One of the most heavily debated new taxes in the health care bill was the tax on high-cost insurance plans. Beginning in 2018, a 40 percent excise tax will be imposed on employer-provided insurance plans with an actuarial value in excess of $10,200 for an individual or $27,500 for families. (The threshold is increased to $11,850 for individuals and $30,950 for families whose head of household is over the age of 55 or engaged in high-risk professions such as police, firefighters, or miners.) The tax falls on the value of the plan over the threshold and is paid by the insurer, or the employer if self-insured.192 The benefit value of employer-sponsored coverage would include the value of contributions to employees’ FSAs, HRAs, and HSAs. It is estimated that 12 percent of workers will initially have policies that are subject to the tax.193 However, the tax is indexed to inflation rather than the faster-rising medical inflation, which drives insurance premiums. As a result, more and more workers will eventually find their insurance plans falling subject to the tax. In fact, a study for the benefits consulting firm Towers Watson concludes, “Assuming even reasonable annual plan cost increases to project 2018 costs, many of today’s average plans will easily exceed the cost ceilings directed at today’s ‘gold-plated’ plans.”194 Payroll tax hike. The Medicare payroll tax will be increased from 2.9 percent today to 3.8 percent for individuals with incomes over $200,000 for a single individual or $250,000 for a couple.195 The payroll tax hike would mean that in eight states, workers would face marginal tax rates in excess of 50 percent (see Figure 5).196 Tax on Investment Income. Starting in 2013, the 3.8 percent Medicare tax will be applied to capital gains and interest and dividend income if an individual’s total gross income exceeds $200,000 or a couple’s income exceeds $250,000.197 The tax would only apply to the amount of income in excess of those limits, but would be based on total income. Thus, if a couple had $200,000 in wage income and $100,000 in capital gains, $50,000 would be taxed. Moreover, the definition of capital gains includes capital gains from the sale of real estate, meaning that an individual who sold his or her home for a profit of $200,000 or more would be subject to the tax. Given the current weakness in the housing market, this would seem to create a particularly pernicious outcome. Numerous studies have shown that high capital gains taxes discourage investment, resulting in lower economic growth, fewer jobs, and reduced wages. Limit on Itemized Deductions. Beginning in 2013, the threshold at which taxpayers can deduct medical expenses will be raised from the current 7.5 percent of adjusted gross income to a new floor of 10 percent.198 The increased threshold would be postponed until 2016 for taxpayers age 65 or older.199 Tax on Prescription Drugs. Starting this year, the legislation imposes a new tax on brand-name prescription drugs designed to raise a specific amount of money annually. Rather than imposing a specific tax amount, the legislation identifies a specific amount of revenue to be raised, ranging from $2.5 billion in 2011 to $4.2 billion in 2018, before leveling off at $2.8 billion thereafter, and

assigns a proportion of that amount to pharmaceutical manufacturers according to a formula based on the company’s aggregate revenue from branded prescription drugs.200 The structure of this tax almost guarantees that it will be passed along to consumers through higher prices. Tax on Medical Devices. A 2.3 percent federal sales tax is imposed on medical devices, which includes everything from CT scanners to surgical scissors.201 The secretary of HHS has the authority to waive this tax for items that are “sold at retail for use by the general public.”202 However, almost everything used by doctors, hospitals, or clinics would be taxed. The tax would also fall on laboratory tests. The government’s chief actuary has concluded that this tax, as those on pharmaceutical manufacturers and insurers “would generally be passed through to health consumers.”203 In fact, a study by the Republican staff of the Joint Economic Committee estimates that the pass-through could cost the typical family of four with job-based coverage an additional $1,000 a year in higher premiums.204 Additional Taxes on Insurers. Similar to the tax on pharmaceutical companies, the legislation imposes a tax on health insurers based on their market share.205 The total assessment will begin at $8 billion and rise to $14.3 billion by 2018. Thereafter the total assessment will increase by the same percentage as premium growth for the previous year.206 The tax will be allocated according to a formula based on both the total premiums collected by an insurer and the insurer’s administrative costs.207 However, some insurers in Michigan and Nebraska received a special exemption.208 This tax is also expected to be passed through to consumers through higher premiums. (Interestingly, AARP is exempt from this tax on sales of its highly profitable Medigap policies.)209 Tax on Tanning Beds. The legislation imposes a 5 percent tax on tanning salons.210 While tanning may be seen as a luxury or frivolous expenditure, it is actually a recommended treatment for psoriasis and certain other medical conditions. The law makes no distinction between tanning for medical or cosmetic reasons. This tax went into effect July 1, 2010. The combination of taxes and subsidies in this law results in a substantial redistribution of income. The new law will cost families earning more than $348,000 per year, (top 1 percent of incomes) an additional $52,000 per year on average in new taxes and reduced benefits.211 In contrast, those earning $18,000–$55,000 per year will see a net income increase of roughly $2,000 per family.212

The new law contains other tax-related provisions that will add significantly to business costs. For example, the legislation requires that businesses provide a 1099 form to every vendor with whom they do more than $600 worth of business over the course of a year. 213 This provision has proven so unpopular that there is strong bipartisan support for repeal. In fact, on February 2, 2011, the Senate voted 81 to 17 to repeal this provision. The House will likely follow suit.214 For both individual Americans and businesses large and small, the Patient Protection and Affordable Care Act is a tax and regulatory nightmare.

The CLASS Act The health care legislation establishes a new national long-term care program, called the Community Living Assistance and Support Act (CLASS Act), designed to help seniors and the disabled pay for such services as an in-home caretaker or adult day services.215 The CLASS Act is theoretically designed to be self-financed. Workers would be automatically enrolled in the program, but would have the right to opt out. Those who participate will pay a monthly premium that has not yet been determined.216 However, the CBO estimates that will be roughly $123 per month for the average worker. 217 Other estimates suggest that the premiums could be much higher, perhaps $180–$240 per month.218 Workers must contribute to the program for at least five years before they become eligible for benefits.219 (Individuals age 55 or over at the time the program is fully implemented must not only contribute for five years, but must be employed for at least three years following the program’s implementation date.)220 There is no health underwriting of participation or premiums. The actual benefits to be provided under the program are among the many details that remain to be determined but will not be “less than an average of $50 daily adjusted for inflation.”221 Some estimates suggest that benefits will average roughly $75 per day, or slightly more than $27,000 per year. 222 Benefits will be paid directly to the individual, not to the service provider, based on the degree of an individual’s impairment, and can be used to purchase home care and other community-based long-term care assistance, as well as certain nonmedical services.223 Benefits may be paid daily, weekly, monthly, or deferred and rolled over from month to month at the beneficiary’s discretion. 224 There is no lifetime limit to benefits. Eligibility for benefits will be based on the same criteria currently used to qualify for federal-taxqualified long-term-care insurance benefits. That is, a person must be unable to perform at least two “activities of daily living” from a list of six such activities, or need substantial supervision due to cognitive impairment.225 The secretary of HHS may also develop different or additional eligibility requirements.226 During the law’s first five years it will collect premiums, but not pay benefits. As a result, over the first 10 years, the period conveniently included in the budget scoring window, the CLASS Act will run a surplus, collecting more in premiums than it pays out in benefits (see Figure 6).

Those premiums will accrue in a CLASS Act Trust Fund, similar to the Social Security and Medicare trust funds. Using trust fund accounting measures, the premium payments will reduce the federal deficit over that period by roughly $70.2 billion.227 However, thereafter, the CLASS Act will begin to pay out benefits faster than it brings in revenue. Although this time period falls outside the formal 10-year scoring window, CBO warns, “In the decade following 2029, the CLASS program would begin to increase budget deficits . . . by amounts on the order of tens of billions of dollars for each 10-year period.”228 CBO goes on to warn, “We have grave concerns that the real effect of [the CLASS Act] would be to create a new federal entitlement program with large, long-term spending increases that far exceed revenues.” Trust fund accounting, of course, is little more than budgetary sleight of hand. Because the government is structurally incapable of saving such surpluses, they become simply a source of current revenue for the government to use for whatever purpose seems most pressing at the time. It does not provide resources with which to pay the future obligations that have been created.229 Even Senate Budget Committee chairman Kent Conrad (D-ND), who eventually voted for the bill, called it “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.”230 And the bipartisan Commission on Fiscal Responsibility and Reform (the Bowles-Simpson Commission) recognized that the CLASS Act program will “require large general revenue transfers or collapse of its own weight.”231 The commission recommended that the CLASS Act be reformed in some unspecified way so as to make it credibly sustainable over the long term; otherwise it should be repealed. In addition, the structure of the program creates a huge “adverse selection” risk that could add to the program’s financial instability. As the actuarial firm Milliman Associates points out, “The voluntary

aspect of the program allows low-risk individuals to never sign up for the program while the guaranteed issue enables some of the highest-risk individuals to join the program. This is a formula that is virtually certain to create financial instability in any insurance program unless there are other important provisions to control risk.”232 The law tries to ameliorate the adverse selection problem by requiring individuals who opt out of the program to pay a higher premium—up to 250 percent higher—if they later decide to opt back in.233 But experts suggest that these provisions will be insufficient to prevent gaming the system. And other provisions actually make adverse selection more likely. For example, the law limits marketing costs to no more than 3 percent of premiums. The resulting lack of marketing will likely result in a low participation rate by the public at large, while those with health problems are most likely to seek out the benefits. The American Academy of Actuaries estimates that only about 6 percent of the U.S. population will participate in the program.234 And, Richard Foster suggests that just 2 percent of workers will participate after three years.235 Given such low participation levels, the covered population will almost certainly be far sicker than general insurance pool. Foster warns that “there is a very serious risk that the problem of adverse selection will make the CLASS program unsustainable.”236 Making matters worse, the legislation caps premiums for low-income workers and undergraduate students and prohibits future premium hikes for some groups of retirees.237 Therefore, if the program is to remain self-sustaining, other workers will have to bear a disproportionate share of future premium hikes. That in turn increases the risk that program premiums will exceed those for products available in the private market. Healthier individuals, in particular, would have an incentive to flee the program for less expensive private alternatives, leaving only the sickest and most expensive participants in the government plan. The adverse selection death spiral would be in full force, which could tempt the government to solve the problem by making participation mandatory, forcing Americans into a program they may not want and to which there are superior private alternatives.238 The only other alternative will be a taxpayer bailout. The CLASS Act, therefore, while little debated, may represent one of the health care legislation’s biggest fiscal time bombs.

Growing the Nanny State A little-discussed provision of the health care legislation requires restaurant chains with at least 20 locations or franchises to post calorie counts next to prices on menus, menu boards, and drive-through menus. In addition, restaurateurs would be required to post a brief statement regarding daily caloric intake and advise guests that additional nutrition information is available. Other nutrition data, which must be available on request, would include calories from fat, total fat, saturated fat, cholesterol, sodium, carbohydrates, sugars, dietary fiber and protein.239 More than 200,000 establishments will be affected by the change.240 The law also requires nutrition information to be posted on food and beverage vending machines.241 There is no doubt that the United States has a serious obesity problem.242 However, posting calories is unlikely to have a significant impact. Studies show that only about 56 percent of chain restaurant customers said they even notice posted calorie information, while even fewer, just 15 percent, take the calorie information into account when making their choices.243 But, while they are unlikely to significantly reduce obesity, the new regulations will impose a cost on restaurants and consumers. Estimates suggest that the cost of analyzing calories runs as high as $1,000 per meal.244 In addition there will be the cost of changing all those menus and signs. And, the cost of posting the information on vending machines has been estimated to be at least $56.4 million for the first year.245 While the financial cost of this provision is not substantial, especially in the context of other taxes and regulatory costs imposed by this law, it does represent yet another blow against individual responsibility.

Other Provisions The legislation includes a number of pilot programs designed to increase quality of health care or control costs. Most are well intentioned but unlikely to have significant impact, especially in the short term. These would include programs such as bundled payments, global payments, accountable-care organizations and medical homes through multiple payers and settings.246 It would also create a new Center for Innovation within the Centers for Medicare and Medicaid Services (CMS) to evaluate innovative models of care, and would require CMS to develop a National Quality Strategy to “improve care delivery, health outcomes and population health.247 The federal government would also provide grants to states for incentives for Medicaid beneficiaries to participate in healthy-lifestyle programs. A state option would enroll Medicaid beneficiaries with chronic illnesses into health homes that offer comprehensive, team-based care, and a new optional Medicaid benefit would allow people with disabilities to receive community-based services and supports.248 Other grants would provide incentives for states to shift Medicaid beneficiaries away from nursing homes and toward care in the home or community.249 The law would also reward hospitals for providing value-based care, and penalize hospitals that perform poorly on quality measures such as preventable hospital readmissions.250 Of greater concern is a provision to establish a private, nonprofit institute to conduct comparative effectiveness research.251 Many health care reform advocates believe that much of U.S. health care spending is wasteful or unnecessary. Certainly it is impossible to draw any sort of direct correlation between the amount of health care spending and outcomes.252 In fact, by some estimates as much as 30 percent of all U.S. health spending produces no discernable value.253 Medicare spending, for instance, varies wildly from region to region, without any evidence that the variation is reflected in the health of patients or procedural outcomes.254 The Congressional Budget Office suggests that we could save as much as $700 billion annually if we could avoid treatments that do not result in the best outcomes.255 It makes sense, therefore, to test and develop information on the effectiveness of various treatments and technology. Critics fear, however, that comparative effectiveness research will not simply be used to provide information, but to impose a government-dictated method of practicing medicine. The legislation prohibits use of the research to create health care practice guidelines or for insurance coverage decisions.256 The research would initially be informative only. Still, there is no doubt that many reformers hope to ultimately use the information to restrict the provision of “unnecessary” care.257 The Patient Protection and Affordable Care Act also includes several provisions aimed at increasing the health care workforce. This is particularly important given the law’s emphasis on increasing coverage and therefore the demand for services. The United States already faces a potential shortage of physicians, especially primary-care physicians and certain specialties such as geriatric care. Some estimates suggest we will face a shortage of more than 150,000 physicians in the next 15 years.258 The legislation itself could exacerbate this trend if physicians find their reimbursement rates reduced under Medicare and Medicaid, or find more bureaucratic interference with their medical decisionmaking. Indeed, one survey found that 45 percent of physicians would at least consider the possibility of quitting as a result of this health care legislation.259

The law attempts to combat this by increasing funding for physician and nursing educational loan programs, and would expand loan forgiveness under the National Health Service Corps.260 It would also fund new educational centers in geriatric care, chronic-care management, and long-term care.261 It also takes more controversial steps toward increasing the supply of primary-care physicians by shifting reimbursement rates for government programs, such as Medicare and Medicaid, to reduce payments to specialists while increasing reimbursement for primary care.262 Yet, what possible reason is there to believe that the federal government can (a) know the proper mix of primary-care physicians and specialists, and (b) fine-tune reimbursements in a way that will produce those results? Nothing in the government’s previous activities suggests that such central planning would be effective. Finally, there is a host of special interest provisions. The so-called “cornhusker kickback” (a provision that committed the federal government to picking up the cost of Nebraska’s Medicaid expansion forever) was removed by the reconciliation bill.263 However, much other pork remains. For example, the legislation included $100 million in special funding for a hospital in Connecticut;264 and money for asbestos abatement in a Montana town.265 There was also a provision that gives drug makers 12 years of protection, or exclusivity, to sell biologic medicines before facing the threat of cheaper, off-brand alternatives.266

Expanded, Not Universal, Coverage Passage of health care reform was heralded by some in the media as providing “near universal coverage.”267 Indeed, President Obama made it clear that one of the primary reasons he was pushing for health care reform was “it should mean that all Americans could get coverage.”268 But by this standard, the Patient Protection and Affordable Care Act falls far short of its goals. According the Congressional Budget Office, the legislation would reduce the number of uninsured Americans by about 32 million people by 2019.269 Most of those gains in the number of insured will not occur until after 2014 when the mandates and subsidies kick in. And even by 2019, CBO expects there to be more than 23 million uninsured (see Figure 7).270 About one-third of the uninsured would be illegal immigrants. But that would still leave 15–16 million legal, non-elderly U.S. residents without health insurance.

Supporters of the legislation point out that that would decrease the number of uninsured Americans to roughly 6–8 percent of non-elderly Americans, a far cry from universal coverage, but undoubtedly better than today’s 15 percent.271 Independent analysis suggests a modestly more pessimistic result. The RAND Corporation, for example, estimates that roughly 28 million more Americans would be insured under the legislation than would have been under the status quo, leaving roughly 25 million uninsured.272 RAND also estimates

that increases in coverage would occur somewhat more slowly than does the CBO.273 Not surprisingly, most of those remaining uninsured will be young and healthy. In fact, the uninsured after implementation are likely to be somewhat younger, healthier, and wealthier as a group than today’s uninsured.274 If so, it may prove a blow to projections of reduced insurance costs through bringing the young and healthy into the insurance pool. In addition, as many as 38 percent of the remaining uninsured will be eligible for Medicaid, SCHIP, or government programs, but will not have enrolled. 275 That is a similar percentage to the status quo. And, nearly a third will be illegal immigrants, roughly double the proportion of uninsured today who are undocumented residents.276 This suggests that we should not anticipate significant future reductions in the number of uninsured beyond 2019. It is also important to realize that roughly 47 percent of the newly insured will not be receiving traditional health insurance, but will instead be put into the Medicaid or SCHIP programs. 277 Given that roughly a third of physicians no longer accept Medicaid patients,278 these individuals may still find significant barriers to access, despite their newly insured status. The Massachusetts health reform plan enacted in 2006 provides a useful warning on this score. Like the new federal legislation, Massachusetts expanded its coverage in large part by enrolling more people in Medicaid. However, after the reform was enacted, 6.9 percent of low-income residents reported that they could not find a doctor or get an appointment, a nearly 50 percent increase since the plan went into effect.279 Waiting times were an even bigger problem, with the wait for seeing an internist, for example, increasing from 33 days to 52 days during the program’s first year.280

Increased Spending, Increased Debt Throughout the health care debate, President Obama emphasized the need to control the rise in health care spending. As the president put it: We’ve got to control costs, both for families and businesses, but also for our government. Everybody out there who talks about deficits has to acknowledge that the single biggest driver of our deficits is health care spending. We cannot deal with our deficits and debt long term unless we get a handle on that. So that has to be part of a package.281 Proponents of reform correctly pointed out that the U.S. spends far more on health care than any other country, whether measured as a percentage of GDP or by expenditure per capita. 282 Health care costs are rising faster than GDP growth and now total more than $2.5 trillion—more than Americans spend on housing, food, national defense, or automobiles.283 However, the Patient Protection and Affordable Care Act fails to do anything to reduce or even restrain the growth in those costs. According to Richard Foster, the government’s chief health care actuary, the legislation will actually increase U.S. health care spending by $311 billion over 10 years (see Figure 8).284

This should not come as a big surprise. The primary focus of the legislation was to expand insurance

coverage. Giving more people access to more insurance, not to mention mandating that current insurance cover more services, will undoubtedly result in more spending. In fact, we should not be surprised if the increased coverage results in even more spending than the government predicts. MIT economist Amy Finkelstein, for example, estimates that roughly 40 percent of the real increase in per capita health spending from 1950 to 1990 reflected the spread of comprehensive health insurance.285 If utilization increases substantially as result of the coverage expansions in this legislation, spending could likewise skyrocket. The failure to restrain costs will have serious consequences for government spending under the legislation. As CBO director Douglas Elmendorf noted in his official blog: The rising costs of health care will put tremendous pressure on the federal budget during the next few decades and beyond. . . . In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure. In fact, CBO estimated that the health legislation will increase the federal budgetary commitment to health care.286 The Congressional Budget Office scored the Senate-passed Patient Protection and Affordable Care Act as costing $875 billion over 10 years.287 The changes passed under reconciliation increased that cost to $938 billion.288 However, those numbers do not tell the whole story, nor do they reveal the law’s true cost. The CBO does not provide formal budget analysis beyond the 10-year window, pointing out that any calculation made beyond 2020, “reflects the even greater degree of uncertainty” regarding those years.289 However, since program costs will be on an upward trajectory through 2019 (see Figure 9), it expects the cost of the program to continue to grow rapidly after 2019. Moreover, as Figure 9 makes clear, most of the spending under this legislation doesn’t take effect until 2014. So the “10-year” cost projection includes only 6 years of the bill. However, as Figure 9 shows, if we look at the legislation more honestly over the first 10 years that the programs are actually in existence, say from 2014 to 2024, it would actually cost nearly $2 trillion.

CBO officially scored the bill as reducing the budget deficit by $138 billion over 10 years. Putting that in perspective, if true, it would amount to roughly 62 percent of the total deficit that the federal government incurred in February of 2010 alone.290 In reality, however, that scoring is achieved through the use of yet another budget gimmick. As mentioned above, the legislation anticipates a 23 percent reduction in Medicare fee-for-service reimbursement payments to providers, yielding $196 billion in savings.291 Those cuts were part of a Medicare reimbursement reduction first called for in 2003, as part of changes to the sustainable growth rate required by the Balanced Budget Act of 1997. 292 However, as discussed earlier, the cuts have never actually been implemented, with Congress regularly postponing their effective date. Current law would reduce payment rates for providers by 21 percent beginning in January 2011, and by an average of 2 percent each year thereafter through the end of the decade. This is the baseline that the CBO used to project the bill’s future costs. However no one in Washington seriously believes that those cuts will actually occur. In fact, congressional Democrats have introduced a separate bill, the Medicare Physicians’ Payment Reform Act of 2009 (HR 3961), effectively repealing the cuts. According to the Congressional Budget Office, the 10-year cost of repealing those cuts would be $259 billion.293 However, other sources, including the Obama administration have suggested the cost could go as high as $371 billion.294 In a letter to Congressman Paul Ryan (R-WI), the Congressional Budget Office confirms that if the costs of repealing the payment reductions, known as the “doc-fix,” as reflected in HR 3961, were to be included in the cost of health care reform, the legislation would actually increase budget deficits by $59 billion over 10 years. 295

Moreover, the initially projected cost failed to include discretionary costs associated with the program’s implementation. The legislation does not provide specific expenditures for these items, but simply authorizes “such sums as may be necessary.” Therefore, because the costs are subject to annual appropriation and the actions of future congresses are difficult to predict, it may be impossible to put a precise figure to the amount. However, CBO suggests that they could add as much as $115 billion to the 10-year cost of the bill.296 As Figure 10 shows, adding the cost of the doc-fix, discretionary costs, and other costs that were not originally included in CBO’s score to the legislation brings the total cost over 10 years of actual operation to over $2.7 trillion.297 In addition, estimates of the PPACA’s impact on the budget deficit double count both Social Security taxes and revenue and savings from Medicare. As mentioned above, scoring for the health care bill anticipates a net reduction in Medicare spending of $416.5 billion over 10 years. The law would also bring in additional payroll tax revenue through the 0.9 percent increase in the Medicare payroll tax, and the imposition of the tax to capital gains and interest and dividend income. This money is funneled through the Medicare Trust Fund, reducing the unfunded liabilities under Medicare Part B from $37 trillion to just $12.9 trillion.298 As mentioned, this will extend the life of the Trust Fund by as much as 12 years. The new funds would indeed be routed through the Medicare Trust Fund, where government trust fund accounting methodology would count them as extending the trust fund’s solvency. However, as has been pointed out with regard to the Social Security Trust Fund, the government is structurally incapable of actually saving the money. In fact, the funds would be used to purchase special-issue Treasury bonds. When the bonds are purchased, the funds used to purchase them become general revenue, and are spent on the government’s annual general operating expenses. What remains behind in the trust fund are the

bonds, plus an interest payment attributed to the bonds (also paid in bonds, rather than cash). Government bonds are, in essence, a form of IOU. They are a promise against future tax revenue. When the bonds become due, the government will have to repay them out of general revenue.299 In the meantime, however, the government counts on that new general revenue to pay for the cost of the new health legislation. Thus, the government spends the money now, while pretending it is available in the future to pay for future Medicare benefits. This results in a double counting of roughly $398 billion. As Medicare’s chief actuary points out, “In practice, the improved [Medicare] financing cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.”300 The same is true regarding $53 billion in additional Social Security taxes generated under the PPAC. CBO assumes that, as discussed above, many employers may ultimately decide that it is cheaper to “pay than play,” and will stop offering health insurance to their workers. CBO assumes that in those cases workers will receive higher wages to offset at least some of the loss in non-wage (insurance) compensation. The workers will, however, have to pay taxes, including Social Security payroll taxes, on those additional wages. The additional revenue from those taxes is counted in CBO’s scoring of the Patient Protection and Affordable Care Act. However, because they are paying additional taxes, those workers are also accruing additional Social Security benefits. Yet, because those benefits will paid outside the 10-year budget window, the cost of the additional benefits is not included in the scoring. Only one side of the revenue-benefit equation is included. And, as noted above, revenue from the CLASS Act is similarly double counted. Eliminating all of this double counting, and including the full cost of the bill as discussed above, means that the PPACA will actually add at least $823 billion to the budget deficit over the program’s first 10 years. Some estimates suggest that over the program’s second 10 years, it could add as much as an additional $1.5 trillion to the deficit.301 Finally, it is important to point out that much of the bill’s cost is shifted off the federal books onto businesses, individuals, and state governments through mandates and other regulatory requirements. These business and individual mandates are the equivalent of tax increases, but those costs aren’t included in the law’s cost estimates. And, as mentioned above, state governments will have to pick up at least $34 billion of the cost to expand Medicaid. When the CBO scored the Clinton health care plan back in 1994, those costs were included, and accounted for as much as 60 percent of the law’s total cost. 302 Despite repeated requests, CBO did not produce a similar analysis for this bill. But if a similar ratio were to hold for the Patient Protection and Affordable Care Act, the real cost of the legislation would be somewhere in the vicinity of $7 trillion.303 It is also worth noting that cost estimates for government programs have been wildly optimistic over the years, especially for health care programs. For example, when Medicare was instituted in 1965, government actuaries estimated that the cost of Medicare Part A would be $9 billion by 1990. In actuality, it was seven times higher—$67 billion. 304 Similarly, in 1987, Medicaid’s special hospitals subsidy was projected to cost $100 million annually by 1992, just five years later; it actually cost $11 billion, more than 100 times as much.305 And, in 1988, when Medicare’s home-care benefit was established, the projected cost for 1993 was $4 billion, but the actual cost in 1993 was $10 billion.306 If the current estimates for the cost of Obamacare are off by similar orders of magnitude, costs and future deficits would be even larger.

There is certainly reason to believe that the costs of this law will exceed projections. For example, as discussed above, increased insurance coverage could lead to increased utilization and higher subsidy costs. At the same time, if companies choose to drop their current insurance and dump employees into subsidized coverage or Medicaid, it could substantially increase the program’s costs. One estimate, cited by Fortune magazine, notes that “if 50 percent of people covered by company plans get dumped, federal health care costs will rise by $160 billion in 2016, in addition to the $93 billion in subsidies already forecast by the CBO.”307 Another study, by former CBO director Douglas Holtz-Eakin and Cameron Smith warns that shifting employees to government-subsidized coverage could increase the legislation’s cost by as much as $1.4 trillion over 10 years.308 And, adverse selection could increase Medicaid costs. Thus, the multi- trillion-dollar estimated cost of this legislation should be seen as a best case scenario. This is all taking place at a time when the government is facing an unprecedented budgetary crisis. The U.S. budget deficit hit $1.5 trillion in 2011, and we are expected to add as much as $9 trillion to the national debt over the next 10 years, a debt that is already in excess of $14.3 trillion and rising at a rate of nearly $4 billion per day.309 Under current projections, government spending will rise from its traditional 20–21 percent of our gross domestic product to 43 percent by 2050.310 That would require more than a doubling of the tax burden just to keep up.

Figure 11 shows how the new health care law will add to the burden of future government spending. By 2050, the new law will push total government spending toward 50 percent of GDP. By the end of the century, federal government spending would become almost unfathomable, surpassing 80 percent of GDP. By any realistic measure, therefore, the Patient Protection and Affordable Care Act dramatically increases government spending, the national debt, and the burden of government on the economy as a

whole.

Higher Insurance Premiums During the 2008 presidential campaign, candidate Obama promised that his health care reform plan would reduce premiums by up to $2,500 per year. 311 That promise has long since been abandoned. However, without putting a dollar amount to it, the president continues to promise that health care reform will reduce insurance costs.312 While that may be true for those Americans receiving subsidies or those who are currently in poor health, millions of others will likely end up paying higher premiums. Today, the average nongroup-insurance plan costs $2,985 annually for an individual and $6,328 for a family.313 In the non-group—that is employer-based—market, premiums average $4,825 for an individual, and $13,375 for a family. 314 CBO estimates that if reform had not passed, premiums in the individual market would have risen to $5,200 for an individual and $13,100 for a family by 2016. And, the cost of employer-provided insurance would rise to $7,800 for an individual, $20,300 for a family. 315 That increase would place a significant burden on both individuals and businesses. However, the health care law does little or nothing to change this. The biggest businesses, those with more than 100 employees, would see the biggest benefit, but even here the benefit would be minimal. CBO estimates that large companies would see a premium increase between zero and three percent less than would otherwise occur. 316 That means that under the best case scenario, their premiums for a family plan would only increase to $20,100, compared with $13,375 today, and $20,300 if the bill hadn’t passed.317 That represents a savings of $200 over what would have happened if the bill had not passed, but still represents a $6,350 increase over what the company is paying today. Small businesses would see a premium increase between zero and just 1 percent less than would otherwise occur.318 Thus, again under the best-case scenario, small business premiums for a family plan would only increase to $19,200, compared to $19,300 if the bill hadn’t passed, a savings of just $100.319 But the millions of Americans who purchase insurance on their own through the nongroup market will actually be worse off as a result of this law. According to CBO, their premiums will increase 10–13 percent faster than if the bill had not passed. That is, an individual premium would increase from $2,985 today to $5,800, compared to $5,500 if the bill had never passed. A family policy will increase from today’s $6,328 to $15,200. If the bill hadn’t passed, it would only have increased to $13,100. 320 Thus, this bill will cost a family buying their own health insurance an additional $2,100 per year in higher premiums (see Table 1).

Indeed,

premiums for 2011 have risen rapidly due to factors both related and unrelated to the PPACA. 321 Early estimates suggest that the bill itself has been responsible for a premium hike of roughly 9 to 12 percent.322 Of course, for low- and some middle-income Americans, any increase in premiums may ultimately be offset by government subsidies. But individuals whose income falls in the range where subsidies begin to phase out and those not receiving subsidies will likely see significant increases in what they have to pay. The bill’s proponents also point out that most of the increased cost is due to increased benefits mandated by the new law, and the new insurance reforms. It is not that the per unit cost of insurance will have risen faster than the baseline, but that individuals will be purchasing more insurance. That, however, does not change the bottom line. Individuals will be paying more, and not because they choose to do so. If everyone was mandated to trade their current car for a new BMW, people would have a better car— but they would still be poorer. That is not at all what the president promised.

Conclusion Health care reform was designed to accomplish three goals: (1) provide health insurance coverage for all Americans, (2) reduce insurance costs for individuals, businesses, and government, and (3) increase the quality of health care and the value received for each dollar of health care spending. Judged by these goals, the new law should be considered a colossal failure. The president and the law’s supporters in Congress also promised that the legislation would not increase the federal budget deficit or unduly burden the economy. And, of course, we were repeatedly promised that “If you like your health care plan, you’ll be able to keep your health care plan, period. No one will take it away, no matter what.”323 But Richard Foster, the government’s own chief actuary, has testified that that statement is “not true.” 324 Individual and employer mandates will ultimately force individuals and businesses to change plans in order to comply with the government’s new standards for insurance, even if the new plans are more expensive or contain benefits that people don’t want. Flexible spending accounts have already been reduced, and health savings accounts could be eliminated. More than 7 million seniors with Medicare Advantage plans will likely be forced out of those plans and back into traditional Medicare. On these grounds too, the Patient Protection and Affordable Care Act doesn’t come close to living up to its promises. The legislation comes closest to success on the issue of expanding the number of Americans with insurance. Clearly, as a result of this law, millions more Americans will receive coverage. This results mainly from an expansion of government subsidies and other programs, with nearly half of the newly insured coming through the troubled Medicaid program. Thus, the degree to which expanded coverage will lead to expanded access is still an open question. And, despite the passage of this legislation, at least 23 million Americans will still be uninsured by 2019. On this dimension, therefore, the new law is an improvement over the status quo, but a surprisingly modest one. The law also makes some modest insurance reforms that will prohibit some of the industry’s more unpopular practices. However, those changes come at the price of increased insurance costs, especially for younger and healthier individuals, and reduced consumer choice. At the same time, the legislation is a major failure when it comes to controlling costs. While we were once promised that health care reform would “bend the cost curve down,”325 this law will actually increase U.S. health care spending. This failure to control costs means that the law will add significantly to the already crushing burden of government spending, taxes, and debt. Accurately measured, the Patient Protection and Affordable Care Act will cost more than $2.7 trillion over its first 10 years of full operation, and add more than $823 billion to the national debt. And this does not even include more than $4.3 trillion in costs shifted to businesses, individuals, and state governments. It is not just government that will face higher costs under this law. In fact, most American workers and businesses will see little or no change in their skyrocketing insurance costs—while millions of others, including younger and healthier workers and those who buy insurance on their own through the nongroup market, will actually see their premiums go up faster as a result of this legislation. Clearly the trajectory of U.S. health care spending under this law is unsustainable. Therefore, it raises the inevitable question of whether it will lead to rationing down the road. We should be clear, however. With a few minor exceptions governing Medicare reimbursements, the law would not directly ration care or allow the government to dictate how doctors practice medicine.

There is no “death board” as Sarah Palin once wrote about in a Facebook posting.326 Even so, by setting in place a structure of increased utilization and rising costs, the new law makes government rationing far more likely in the future.327 Indeed, this trend is already playing out in Massachusetts. With the cost of the state’s reform becoming unsustainable, the legislature established a special commission to investigate the health payment system in a search of ways to control costs.328 In March of 2009, the commission released a list of options that it was considering, including “exclud[ing] coverage of services of low priority/low value” under insurance plans offered through Commonwealth Care. Along the same lines, it has also suggested that Commonwealth Care plans “limit coverage to services that produce the highest value when considering both clinical effectiveness and cost.”329 The Patient Protection and Affordable Care Act will also significantly burden businesses, thereby posing a substantial threat to economic growth and job creation. While some businesses may respond to the law’s employer mandate by choosing to pay the penalty and dumping their workers into public programs, many others will be forced to offset increased costs by reducing wages, benefits, or employment. The legislation also imposes more than $569 billion in new or increased taxes, the vast majority of which will fall on businesses. Many of those taxes, especially those on hospitals, insurers, and medicaldevice manufacturers, will ultimately be passed along through higher health care costs. But other taxes, in particular new taxes on investment income, are likely to reduce economic and job growth. Businesses will also face new administrative and record-keeping requirements under this legislation that will also increase their costs, reducing their ability to hire, expand, or increase compensation. It is becoming increasingly clear that millions of Americans will not be able to keep their current coverage. Seniors with Medicare Advantage and those workers with health savings accounts are the most likely to be forced out of their current plans. Millions of others are at risk as well. As mentioned above, many businesses may choose to “pay” rather than “play,” dropping their current coverage and forcing workers either into Medicaid or to purchase their insurance through the government-run exchanges. CBO’s estimate of 10–12 million workers being dropped from their current employer coverage is probably conservative. With other, and much larger, businesses now reportedly considering such an approach, the number of workers forced out of their current plans could increase significantly. Finally, the law’s individual mandate continues to pose a threat to people being able to keep their current coverage. While the final bill grandfathered current plans—a significant improvement over previous versions—individuals will still be forced to change coverage to a plan that meets government requirements if they make any changes to their current coverage. And, by forbidding noncompliant plans from enrolling any new customers, the law makes those plans nonviable over the long term. As a result, Americans whose current insurance does not meet government requirements may ultimately not have the choice to keep that plan. All of this represents an enormous price to pay in exchange for the law’s small increases in insurance coverage. There is very little “bang for the buck.” Even more significantly, this law represents a fundamental shift in the debate over how to reform health care. It rejects consumer-oriented reforms in favor of a top-down, “command and control,” government-imposed solution. As such, it sets the stage for potentially increased government involvement, and raises the specter, ultimately, of a government-run single-payer system down the road. The debate over health care reform now moves to other forums. Numerous lawsuits have been filed

challenging provisions of the law, especially the individual mandate, with two federal judges striking down all or part of the law. 330 Republicans, having won an enormous victory in the mid-term elections, have vowed to make repealing the PPACA a central part of their legislative agenda. And while institutional barriers such as the filibuster and presidential veto make an actual repeal unlikely, there will almost certainly be efforts by Congress to delay, de-fund, or alter many aspects of the law. One thing is certain—the debate over health care reform is far from over.

Appendix I: A Timeline Anyone expecting to see major changes to the health care system in the next few months or years is liable to be disappointed. Although some insurers and businesses have begun raising rates and taking other preemptive actions in anticipation of changes to come, most of the major provisions of the legislation are phased in quite slowly. As Table 2 shows, the most heavily debated aspects, mandates, subsidies, and even most of the insurance reforms don’t begin until 2014 or later. A handful of small changes began last year, notably a provision allowing parents to keep their children on the parent’s policy until the child reaches age 26 and a ban on preexisting-condition exclusions for children. There was also a $250 rebate to seniors whose prescription drug costs fell within the Medicare Part D “donut hole.” A few other provisions, notably the small business tax credits, kick in this year. From here on, however, there will be few benefits from the law until 2014 or later. At the same time, with the exception of the tax on tanning beds, most of the new taxes in the new law do not start until 2012 or later. The individual and employer mandates do not come into effect until 2014. In fact, some aspects of the new law, such as the tax on “Cadillac” insurance plans do not take place until 2018. The Medicare prescription drug “donut hole” is not scheduled to be fully eliminated until after 2020. This means there remains time to repeal or at least make significant changes to the legislation before most of it takes effect. If not, this legislation will be very bad news for American taxpayers, businesses, health care providers, and patients.

Notes The author thanks Jacob Shmukler and Carey Anne Lafferty for their contributions. 1. David Espo, “ Landmark Health Bill Passes,” Associated Press, March 22, 2010. See also, “ Final Vote Results for Roll Call 165,” March 21, 2010, http://clerk.house.gov/evs/2010/roll165.xml. 2. The Senate did make minor amendments to the bill, requiring it to go back to the House for final approval, which it received the next day. Alan Fram, “ Senate OK’s Health Care Fix-It Bill; House is Next,” Associated Press, March 25, 2010; Erica Werner, “ At Last: Final Health Care Measure Heads to Obama,” Associated Press, March 25, 2010. 3. There are 2,562 pages and 511,520 words when both the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act are combined. 4. HR 3200, sec. 221. Regardless of how it was structured or administered, such a government-run plan would have an inherent advantage in the marketplace because it ultimately could be subsidized by American taxpayers. The government plan could keep its premiums artificially low or offer extra benefits since it could turn to the U.S. Treasury to cover any shortfalls. Consumers naturally would be attracted to the lower-cost, higher-benefit government program, thus undercutting the private market. The actuarial firm Lewin Associates estimated that, depending on how premiums, benefits, reimbursement rates, and subsidies were structured, as many as 118.5 million people, roughly two-thirds of those with insurance today, would have shifted fromprivate to public coverage—or be pushed. Businesses would have had every incentive to dump their workers into the public plan. The result would have been a death spiral for private insurance, and eventually a single government-run system. John Sheils and Randy Haught, “ Analysis of the July 15 Draft of the American Affordable Health Choices Act of 2009,” Lewin Associates, July 23, 2009. 5. HR 3200, sec. 313. 6. Ibid., sec. 441. 7. Rasmussen Reports, “ Election Night 2010: Exit Poll Results,” November 2, 2010, http://www.rasmussenreports.com/public_content/politics/elections/election_2010/election_night/election_night_2010_exit_poll_results 8. http://www.kff.org/kaiserpolls/8120.cfm. 9. Chris Cillizza, “ A Referendum, Sure, but Was It on Health Care?” W ashington Post , November 8, 2010. 10. Russell Berman, “ House Repeals Healthcare Law, The Hill , January 19, 2011. Three Democrats—Dan Boren (OK), Mike McIntyre (NC), and Mike Ross (AR)—joined all 242 Republicans in voting for repeal. 11. A Republican effort to force a Senate vote on repeal failed on a party-line procedural vote, 47–53. David Herszenhorn, “ Senate Rejects Repeal of Health Care Law,” New York Times , February 2, 2011. 12. Equivalent legislation is being considered in current sessions in state legislatures in Arkansas, Florida, Kentucky, Indiana, Maryland, Michigan, Montana, Nebraska, South Carolina, South Dakota, Texas, and Wyoming. “ State Legislation and Actions Challenging Certain Health Reforms, 2010–11,” National Conference of State Legislatures, January 21, 2011, http://ncsl.org/default.aspx?tabid=18906. 13. These lawsuits can be tracked at http://healthcarelawsuits.org/. 14. Twenty-six states joined Florida v. U.S. Dept. of Health and Human Services . Virginia and Oklahoma filed their own cases. 15. Thomas Moore Law Center v. Barack Hussein Obama et al., October 7, 2010; Liberty University v. Geitner , November 30, 2010. 16. Commonwealth of Virginia ex. rel. Cuccinelli v. Sebelius , no. 3:10CV188-HEH (E.D. Va. 2010); Florida v. U.S. Dept. of Health and Human Services . 17. Margaret Talev, “ Health Care Overhaul Spawns Mass Confusion in Public,” McClatchy Newspapers, April 6, 2010. 18. Nancy Pelosi, “ Remarks to the 2010 Legislative Conference for National Association of Counties,” March 9, 2010, http://www.speaker.gov/newsroom/pressreleases?id=1576. 19. In what appears to be an unintentional error, the military’s TRICARE program, which covers nearly 10 million service people,

retirees, and dependents, does not appear to meet the legislation’s definition of “ minimumessential coverage,” meaning individuals in this programwould face penalties for failing to satisfy the mandate. Sen. JimWebb (D-Va) has introduced legislation to correct the error. Michael Posner, “ Veterans Push for Fixes to New Law,” Congress Daily, April 6, 2010. 20. Robert Hartman and Paul van de Water, “ The Budgetary Treatment of an Individual Mandate to Buy Health Insurance,” Congressional Budget Office Memorandum, August 1994. 21. This paper is not the place to do justice to the serious constitutional issues involved. However, those who oppose the mandate on constitutional grounds make generally make two arguments. First, that the federal government lacks the authority to impose such a mandate, especially regarding a matter that is neither interstate nor commerce. Although the Patient Protection and Affordable Care Act contains language justifying itself on the grounds that “ the individual responsibility requirement provided for in this sec. . . . is commercial and economic in nature, and substantially affects interstate commerce,” Patient Protection and Affordable Care Act–Title I, sec. 1501(a)(1). This bill would expand the commerce clause far beyond any current interpretation, and would give the federal government virtually unlimited authority to regulate any activity it chose. As Judge Vinson wrote in his decision in Florida v. U.S. Dept. of Health and Human Services , “ The problemwith this legal rationale, however, is it would essentially have unlimited application. There is quite literally no decision that, in the natural course of events, does not have an economic impact of some sort. The decisions of whether and when (or not) to buy a house, a car, a television, a dinner, or even a morning cup of coffee also have a financial impact that—when aggregated with similar economic decisions—affect the price of that particular product or service and have a substantial effect on interstate commerce. To be sure, it is not difficult to identify an economic decision that has a cumulatively substantial effect on interstate commerce; rather, the difficult task is to find a decision that does not.” (Emphasis added). Proponents, of course, note that the Supreme Court has interpreted the Commerce Clause broadly enough to reach wholly intrastate economic “ activity” that substantially affects interstate commerce. W ickard v. Filburn 317 US 111 (1942). But the individual mandate goes beyond regulating even intrastate activity to regulate non-activity. Under proponents’ interpretation of the Commerce Clause, therefore, Congress would be free to order you to take or not take a job, to sell or not sell your house, to buy or not buy a car. There would have been no need for a “ cash for clunkers” program. Congress could simply have ordered every American to purchase a new car. Judge Vinson put it this way, “Congress could require that people buy and consume broccoli at regular intervals, not only because the required purchases will positively impact interstate commerce, but also because people who eat healthier tend to be healthier, and are thus more productive and put less of a strain on the health care system. Similarly, because virtually no one

can be divorced fromthe transportation market, Congress could require that everyone above a certain income threshold buy a General Motors automobile—now partially government-owned—because those who do not buy GM cars (or those who buy foreign cars) are adversely impacting commerce and a taxpayer-subsidized business.” Florida v. U.S. Dept. of Health and Human Services (42). Second, proponents argue that the penalty is simply a tax and therefore is authorized under Congress’s power “ to lay and collect Taxes.” U.S. Constitution, art. I, § 8, cl. 1. The penalty would seemto much more closely fit the definition of a fine than a tax. As Jeff Rowes and Robert McNamara of the Institute for Justice point out, “ For an exaction to be a true tax, it has to be a genuine revenueraising measure,” whereas the penalty for failing to comply with the mandate “ exists solely to coerce people into acquiring healthcare coverage. If the mandate were to work perfectly, it would raise literally no revenue.” Jeff Rowes and Robert McNamara, unpublished memorandum, Institute for Justice, May 2010, quoted in Robert Levy, “ The Taxing Power of Obamacare, National Review Online, April 20, 2010. And, as Judge Vinson and others have noted, prior to passage of the bill, supporters of the mandate, including President Obama, insisted that the penalty was not a tax. The change frompenalty to tax occurred only after the measure reached the courts. Jennifer Hakerborn, “ Judge Disses Dems ‘Alice in Wonderland’ Defense,” Politico , October 14, 2011. But even if one accepts the argument that the penalty is a tax, it does not meet the constitutional requirements for income, excise, or direct taxes. It does not fit the definition of either an income or excise tax, and if it is a direct tax, it does not meet the constitutional requirement that it be “ apportioned among the several States,” U.S. Constitution. art. I, § 2, cl. 3. Furthermore, the courts have ruled that Congress cannot use the taxing power as a backdoor means of regulating an activity, unless the regulation is authorized elsewhere in the Constitution. Bailey v. Drexel Furniture Co. 259 US 20 (1922). For further discussion, see Randy Barnett, “ The Insurance Mandate in Peril,” W all Street Journal , April 29, 2010 or Levy. The same reasoning holds true regarding supporters’ reliance on the Constitution’s “ Necessary and Proper Clause,” which gives the government the power to enact laws that are necessary and proper to the conduct of its duties. U.S. Constitution, art. I, § 8, cl. 18. Those “ necessary and proper” actions must be linked to otherwise constitutional actions by the government. Judge Vinson made this clear in his decision in Florida v. U.S. Dept. of Health and Human Services : “ The Necessary and Proper Clause cannot be utilized to pass laws for the accomplishment of objects” that are not within Congress’s enumerated powers.” Of course final determination of the constitutionality of the mandate (and the Patient Protection and Affordable Care act more generally) awaits a decision by the U.S. Supreme Court. 22. Jennifer Staman and Cynthia Brougher, “ Requiring Individuals to Obtain Health Insurance: A Constitutional Analysis,” Congressional Research Service, July 24, 2009. 23. “ The Patient Protection and Affordable Care Act (Public Law 111-148), Subtitle F, Part I, sec. 1501, as amended by the Health Care and Education Affordability Reconciliation Act,” sec. 1002. Note this amends Subtitle D of Chapter 48 of the Internal Revenue Code of 1986.

24. Ibid. 25. Patient Protection and Affordable Care Act, Title I, Subtitle F, sec. 1501, as amended by the Health Care and Education Affordability Reconciliation Act, Title I, Subtitle A, sec. 1002(b)(2). Also exempt are American Indians, those with qualifying religious objections, illegal immigrants, and, ironically, people in jail. The Patient Protection and Affordable Care Act, Subtitle F, Part I, sec. 1501(d)(2-4). The 8 percent exemption is far less clear cut than it appears at first glance. For example, a single adult earning 245 percent of the Federal poverty line ($27,500) would be forced to pay the tax, because he could buy subsidized health insurance for a little less than 8 percent of his income. A single adult earning 250 percent of the Federal poverty line (~$28,000) would not have to pay the tax, because subsidized health insurance would cost hima bit more than 8 percent of his income. A 34-year-old single adult earning $50,000 could be in a ratings band where the cheapest health insurance he can purchase is $4,000. If he doesn’t comply with the mandate, he’d have to pay the fine. If after he turns 35, the cheapest health insurance he could purchase is now $4,100, he would no longer have to pay the fine. Alternatively, if at 34 he started smoking (not even buying cigarettes necessarily) and the cheapest insurance he could now purchase was $4,500, he would no longer have to pay the fine. Or if he moved a few zip codes over to a slightly more expensive community rating area and the cheapest health insurance he can purchase is now $4,200, he’s then again exempt froma fine. Thus, whether a person has to pay the tax (and how much) depends not just on income, but also on age, family size, smoking status, and location. 26. Congressional Budget Office and the staff of the Joint Committee on Taxation, “ Payments of Penalties for Being Uninsured under PPACA,” April 22, 2010. 27. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House speaker Nancy Pelosi, March 20, 2010. 28. The Patient Protection and Affordable Care Act, Subtitle D, sec. 1302(b)(1). 29. The Patient Protection and Affordable Care Act, sec. 1302(b)(2)(A). 30. N. C. Aizenman, “ ‘Basic’ Gets Tricky in the Health-Care Law,” W ashington Post , January 15, 2011. 31. The Patient Protection and Affordable Care Act, sec. 1251. 32. While specific rules have not yet been issued for grandfathering individual policies, those rules are likely to be similar to the rules for the small-group market, which have been issued and are discussed below, meaning changes to carriers, benefits, and/or costsharing would remove the plan fromgrandfathered status. 33. House Republicans on the Ways and Means Committee, “ The Wrong Prescription: Democrats’ Health Overhaul Dangerously Expands IRS Authority,” March 18, 2010. Politifact suggests that the number of new agents could be as few as 5,000. Carol Fader, “ Fact Check, 16,500 New IRS Agents Probably Not on the Way,” Jacksonville Times-Union , April 11, 2010. Regardless of quibbles over the numbers, the point remains that the health care bill will result in a significant expansion of the IRS and its powers. In fact, the IRS has informed Congress that it may need to change its mission statement to acknowledge its new responsibilities and duties. Internal Revenue Service, National Taxpayer Advocate, “ 2010 Annual Report to Congress, vol. 1,” p. 17. 34. Martin Vaughn, “ IRS May Withhold Tax Refunds to Enforce Health-Care Law,” W all Street Journal , April 16, 2010. 35. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House speaker Nancy Pelosi, March 20, 2010. 36. Jeanne S. Ringel et al., “ Analysis of the Patient Protection and Affordable Care Act, HR 3590,” Rand Corporation, March 2010. 37. Sharon Long, “ On the Road to Universal Coverage: Impacts of Reformin Massachusetts,” Health Affairs (July/August 2008): w270–w284, Exhibit 6. 38. Allison Cook and John Holahan, “ Health Insurance Coverage and the Uninsured in Massachusetts: An Update Based on the 2005 Current Population Survey Data,” Blue Cross Blue Shield of Massachusetts Foundation, 2006. 39. Kay Lazar, “ Short-TermCustomers Boosting Health Care Costs,” Boston Globe, April 4, 2010. 40. The penalty in Massachusetts is up to half the cost of a standard insurance policy. Chapter 58 of the Acts of 2006, sec. 13. 41. For instance two half-time workers are considered the equivalent of one full-time employee for the purpose of determining a company’s size. A full-time worker is considered to work 30 hours per week. There is also some confusion in the legislation over how companies with exactly 50 workers will be treated. In a testimony to the rushed and sloppy way in which the bill was passed, sec. 1513(A) of the Patient Protection and Affordable Care Act refers to “ at least 50 full time workers,” (emphasis added), while sec. 1513(B) refers to “ more than 50 full times workers” (emphasis added).

42. The Patient Protection and Affordable Care Act, sec. 4908H(a), as amended by the Health Care and Education Affordability Reconciliation Act,” sec. 1003. 43. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House speaker Nancy Pelosi, March 20, 2010. 44. http://www.healthcare.gov/news/factsheets/keeping_the_health_plan_you_have_grandfathered.html. 45. Ibid. 46. Robert Pear, “ Study Points to Health Law Penalties,” New York Times , May 23, 2010. 47. Quoted in Lawrence H. Summers, “ Some Simple Economics of Mandated Benefits,” American Economic Review 79, no. 2 (May 1989): 177–83. 48. Economists are divided about the most likely way that the cost of an employer mandate would be passed along to employees. Some suggest that most of the mandate’s cost would be offset through lower wages. A study by Jonathan Gruber, for example, looking at the impact of a requirement that health insurance cover comprehensive childbirth benefits found strong evidence that employers reduced wages to pay for the benefits. Jonathan Gruber, “ The Incidence of Mandated Maternity Benefits,” American Economic Review 84, no. 3 (June 1994): 662–41. And Alan Krueger and Uwe Reinhardt suggest that in the long run, the cost of the employer mandate would be shifted to the employee not through immediate wage cuts but through smaller future wage increases than would otherwise occur. Alan Krueger and Uwe Reinhardt, “ The Economics of Employer versus Individual Mandates,” Health Affairs 13, no. 2 (Spring II, 1994): 34–53. However, a large group of economists believe that most of the offset costs would come in the formof job loss. They argue that workers are likely to resist current wage reductions, particularly if they value wage compensation over heath insurance, which seems likely for many of the currently uninsured. Aaron Yelowitz, “ Pay-or-Play Health Insurance Mandates: Lessons fromCalifornia,” Public Policy Institute of California, http://www.ppic.org/content/pubs/cep/EP_1006AYEP.pdf. In addition, minimumwage laws provide a floor for how far employers could reduce wages. As Larry Summers, now head of the White House’s National Economic Council, once wrote, the minimumwage means that “ wages cannot fall to offset employers’ cost of providing a mandated benefit, so it is likely to create unemployment.” Summers, pp. 177–83. 49. “ The Impact of Health Reformon Employers,” Towers Watson, May 2010, http://www.towerswatson.com/unitedstates/research/1935. 50. Roughly 70 percent of Americans under age 65 get their health insurance through work. Carmen DeNavas-Walt, et al., “ Income, Poverty and Health Insurance Coverage in the United States: 2006,” Current Population Reports, U.S. Census Bureau, August 2007. Today there is no requirement that businesses provide insurance. And, while most businesses continue to do so (because, in a competitive labor market, it is an effective recruitment and retention tool), there has been a slow but steady decline in the number who do. Elise Gould, “ Employer-Sponsored Health Insurance Erosion Continues,” Employment Policy Institute, October 27, 2009. However, through the exchanges (see below) and expanded Medicaid eligibility, the bill creates a way for businesses to divest themselves of the expense and other headaches of offering health insurance without cutting the worker off completely. This may accelerate the tendency of employers to dump their workers fromtheir current coverage. 51. Jennifer Haberkorn, “ Four Companies Mulled Dropping Health Insurance Plans,” Politico , May 7, 2010. 52. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House Speaker Nancy Pelosi, March 20, 2010. 53. Ibid. 54. Haberkorn, “ Four Companies Mulled Dropping Health Insurance Plans.” The calculation is fairly simple. AT&T, for example, paid $2.4 billion last year in medical costs for its 283,000 workers. If the firmdropped its health insurance plan and instead paid an annual penalty of $2,000 for each uninsured employee, the fines would total less than $600 million, meaning AT&T would save about $1.8 billion a year. John Goodman, “ Goodbye, Employer-Provided Insurance,” W all Street Journal , May 21, 2010. 55. 15 U.S.C. secs. 1011-1015. 56. Interestingly though, for all the hype about insurance reform, the most commonly cited insurance provisions take up roughly 20 pages, or less than one percent of the 2,409-page bill. 57. Public Health Service Act, Title XXVII, Part A, sec. 2705(a)(1-9), as amended by the Patient Protection and Affordable Care Act, Title I, Subtitle C, sec. 1201. 58. Public Health Service Act, Title XXVII, Part A, sec. 2702(a), as amended by Patient Protection and Affordable Care Act, Title I,

Subtitle C, sec. 1201. 59. Ibid. 60. Public Health Service Act, Title XXVII, Part A, sec. 2701, as amended by Patient Protection and Affordable Care Act, Title I, Subtitle C, sec. 1201. 61. Public Health Service Act, Title XXVII, Part A, sec. 2701(a)(1)(A)(iii), as amended by the Patient Protection and Affordable Care Act, Title I, Subtitle C, sec. 1201. 62. The Public Health Service Act, Title XXVII, Part A, sec. 2701(a)(1)(A)(iv), as amended by the Patient Protection and Affordable Care Act, Title I, Subtitle C, sec. 1201, 63. Public Health Service Act, Title XXVII, Part A, sec. 2701(a)(1)(B), as amended by the Patient Protection and Affordable Care Act, Title I, Subtitle C, sec. 1201. 64. The legislation appears to include a loophole that would allow insurers to continue excluding many children with preexisting conditions. Sec. 1201 of the bill prohibits insurers fromexcluding coverage of preexisting conditions for children who are currently covered. Thus, it would require insurers who currently provide coverage for children but exclude payments for certain ongoing medical situations, for example a congenital heart condition, to drop that exclusion. But for children who are not insured today, insurers would not be required to insure themuntil the full ban on preexisting conditions kicks in, in 2014. Robert Pear, “ Coverage now for Sick Children? Check the Fine Print,” New York Times , March 28, 2010. However, despite the wording of the law, most major insurers have said that they will nevertheless cover children with such conditions. Robert Pear, “ Insurers to Comply with Rules on Children,” New York Times , March 30, 2010. At the very least this shows the dangers of rushed legislation. 65. The Patient Protection and Affordable Care Act, Title I, Subtitle B, sec. 1101. Interestingly, high-risk pools were actually an important component of Republican alternatives to the Democratic health bill. 66. The creation of a federal high-risk pool may have created some unintended consequences in the 35 states that already operated high-risk pools. The insurance available through the federal risk pool is frequently more generous and sometimes less expensive than that available through the state pools. However, eligibility rules for the federal pool require applicants to be uninsured for at least six months. That would mean that current participants in the state pools cannot transfer to the federal pool, even if it’s a better deal. Thus people in states that have attempted to deal with the problemof preexisting conditions are, in effect, penalized. Ricardo AlonsoZaldivar, “ Low-Cost Coverage in Obama Health Plan Not for All,” Associated Press, April 16, 2010. 67. “ State-by-State Enrollment in Pre-Existing Condition Insurance Plan, as of November 1, 2010,” healthcare.gov. 68. Phil Galewitz, “ HHS Cuts Premiums for Some High-Risk Pools,” Kaiser Health News , November 5, 2010; Kevin Sack, “ HighRisk Insurance Pools Are Attracting Few,” New York Times , November 4, 2010. 69. See, for instance, Letter fromM. Jodi Rell, Governor of the State of Connecticut, to Kathleen Sebelius, Secretary of U.S. Department of Health and Human Services, September 30, 2010. 70. Carla Johnson, “ Health Premiums Could Rise 17 Percent for Young Adults,” Associated Press, March 29, 2010. 71. Ibid. 72. Brian McManus, “ Universal Coverage + Guaranteed Issue + Modified Community Rating = 95%Rate Increase,” Council for Affordable Health Insurance, August 2009. 73. N. C. Aizenmanm, “ Major Insurers to Stop Offering New Child-Only Policies,” W ashington Post , September 20, 2010. 74. Public Health Service Act, Title XXVII, Part A, sec. 2712, as amended by the Patient Protection and Affordable Care Act, Title I, Subtitle A, sec. 1001. 75. Henry Waxman and Joe Barton, “ Memorandumto Members and Staff of the Subcommittee on Oversight and Investigations: Supplemental Information Regarding the Individual Health Insurance Market,” June 16, 2009, http://energycommerce.house.gov/Press_111/20090616/rescission_supplemental.pdf. 76. Ibid. 77. Public Health Service Act, sec. 2711, as amended by the Patient Protection and Affordable Care Act, Title X, Subtitle A, sec. 10101.

117. Jon Kingsdale, “ About Us: Executive Director’s Message,” March 12, 2009, http://www.mahealthconnector.org/portal/site/connector/template.MAXIMIZE/menuitem.3ef8fb03b7fa1ae4a7ca7738e6468a0c/? javax.portlet.tpst=2fdfb140904d489c8781176033468a0c_ws_MX&javax.portlet.prp_2fdfb140904d489c8781176033468a0c_viewID=conte 118. The Patient Protection and Affordable Care Act, sec. 1321(c). 119. The Patient Protection and Affordable Care Act, sec. 1311(d)(1) 120. The Patient Protection and Affordable Care Act, sec. 1312(c)(3) 121. The Patient Protection and Affordable Care Act, sec. 1312(d)(1). 122. The Patient Protection and Affordable Care Act, sec. 1312(c)(1). 123. The Patient Protection and Affordable Care Act, sec. 1312(d)(3)(D). 124. The Patient Protection and Affordable Care Act, sec. 1312(f)(2)(B). If they do so, many companies may choose to drop their current insurance coverage and push their employees into the exchange. Jennifer Haberkorn, “ Four Companies Mulled Dropping Health Insurance Plans.” That would, of course, mean that millions more American workers would not be able to keep their current coverage. And, since many of those employees would become eligible for subsidies, it would substantially increase the program’s costs. 125. The Patient Protection and Affordable Care Act, sec. 1302(d)(1)(A-D). 126. The Patient Protection and Affordable Care Act, sec. 1302(e)(2). 127. The Patient Protection and Affordable Care Act, sec. 1402(c). 128. Estimates are for 2016. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to Sen. Olympia Snowe, January 11, 2010.

129. Patient Protection and Affordable Care Act, sec. 1311(d)(3)(ii). 130. Patient Protection and Affordable Care Act, Title I, Subtitle D, Part IV, sec. 1334(g)(2), as amended by sec. 10104(q). 131. Patient Protection and Affordable Care Act, Title I, Subtitle D, Part IV, sec. 1334(b)(2), as amended by sec. 10104(q). The legislation also prohibits federal funds frombeing used for abortion services and requires separate accounts for payments for such services. Patient Protection and Affordable Care Act, Title I, Subtitle D, sec. 1303(b)(2)(B)(i), as amended by PPACA, Title X, Subtitle A, sec. 10104(c). 132. A cooperative, or co-op, is simply a member-owned business, operated on a not-for-profit basis, with the officers and directors elected by the members, in this case presumably the people whomit insures. States already have the power to charter co-ops, including health insurance co-ops. In fact, several co-operative insurance companies already exist. Health Partners, Inc. in Minneapolis has 660,000 members and provides health care, health insurance, and HMO coverage. The Group Health Cooperative in Seattle provides health coverage for 10 percent of Washington State residents. PacAdvantage, a California co-op, covers 147,000 people. There is no evidence that they are significantly less expensive or more efficient than other insurers. Several previous attempts by governments to set up co-ops have, in fact, failed. Perhaps the largest such failure was the Florida Community Health Purchasing Alliance, which was set up by the State of Florida in 1993, and at one time covered 98,000 people. It was unable to attract small business customers and ultimately went out of business in 2000. 133. See, for example, John Goodman, “ What Is Consumer-Directed Health Care?” Health Affairs 25 (November–December 2006): 540–43. See also, Michael Tanner and Michael Cannon, Healthy Competition: W hat’s Holding Back Health Care and How to Free It (Washington, Cato Institute, 2008, 2nd ed.); John Goodman and Gerald Musgrave, Patient Power: Solving America’s Health Care Crisis (Washington: Cato Institute, 1993). 134. Essentially, we all want to live forever. This makes health care a very desirable good. At the same time, the normal restraints imposed by price are frequently lacking. Today, of every dollar spent on health care in this country, just 13 cents is paid for by the person actually consuming the goods or services. Roughly half is paid for by government, and the remainder is covered by private insurance. As long as someone else is paying, consumers have every reason to consume as much health care as is available. By contrast, when consumers share in the cost of their health-care purchasing decisions, they are more likely to make those decisions on the basis of price and value. Take just one example. If everyone were to receive a CT brain scan every year as part of their annual physical, we would undoubtedly discover a small number of brain cancers much earlier than we otherwise would, perhaps early enough to save a few patients’ lives. But given the cost of such a scan, adding it to everyone’s annual physical would quickly bankrupt the nation. But, if they are spending their own money, consumers will make their own rationing decisions based on price and value. That CT scan that looked so desirable when someone else was paying may not be so desirable if you have to pay for it yourself. The consumer himself becomes the one who says no. The RAND Health Insurance Experiment, the largest study ever done of consumer health purchasing behavior, provides ample evidence that consumers can make informed cost-value decisions about their health care. Under the experiment, insurance deductibles were varied fromzero to $1,000. Those with no out-of-pocket costs consumed substantially more health care than those who had to share in the cost of care. Yet, with a few exceptions, the effect on outcomes was minimal. Emmett B. Keeler, “ Effects of Cost Sharing on Use of Medical Services and Health,” RAND Corporation, Health Policy Program, 1992; See also, Joseph P. Newhouse, “ Some InterimResults froma Controlled Trial of Cost Sharing in Health Insurance,” New England Journal of Medicine 305 (December 17, 1981): 1501–07. And, in the real world, we have seen far smaller increases in the cost of those services, like Lasik eye surgery or dental care, that are not generally covered by insurance, than for those procedures that are insured. Barbara Kiviat, “ Can Price Shopping Improve Health Care?” Time, April 19, 2010. 135. Barack Obama, The Audacity of Hope: Thoughts on Reclaiming the American Dream (New York: Three Rivers Press, 2006), p. 179. 136. “ 2010 Census Shows 10 Million People Covered by HAS/High-Deductible Health Insurance Plans,” America’s Health Insurance Plans (AHIP), press release, May 2010. A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan. The funds contributed to the account are not subject to federal income or payroll taxes at the time of deposit. Unspent funds in an HSA may be rolled over fromyear to year, and may be withdrawn for nonmedical purposes beginning at age 65. 137. The Patient Protection and Affordable Care Act, Title IX, Subtitle A, sec. 9004. The Joint Committee on Taxation estimates this tax will cost families an additional $1.4 billion over the bill’s first 10 years. Joint Committee on Taxation, “ Estimated Revenue Effects of the Manager’s Amendment to the Revenue Provisions Contained in the ‘Patient Protection and Affordable Care Act,’” December 19, 2009. 138. The Patient Protection and Affordable Care Act, sec. 9003.

139. “ Actuarial value” is a method of measuring an insurance plan’s benefit generosity. It is expressed as the percentage of medical expenses estimated to be paid by the insurer for a standard population and set of allowed charges. For a more detailed explanation, see Chris Peterson, “ Setting and Valuing Health Insurance Benefits,” Congressional Research Service, April 6, 2009. 140. The Patient Protection and Affordable Care Act, sec.1302(d)(2)(B). 141. Ibid., sec. 10406. 142. Ibid., sec. 4003. 143. John Fund, “ Health Reform’s Hidden Victims,” W all Street Journal , July 24, 2009. Indeed, at least one Virginia-based insurer that specialized in HSAs has already gone out of business, citing the “ considerable uncertainties” created by the new health care law. Michael Schwartz, “ Start Up Health Insurer Shutting,” RichmondBizSense.com, June 4, 2010, http://www.richmondbizsense.com/2010/06/04/startup-health-insurer-shutting/. 144. Bureau of Labor Statistics, “ Pretax Benefits: Access, Private Industry Workers,” National Compensation Survey, March 2007, Table 24. Flexible spending accounts (FSAs) allow an employee to set aside a portion of his or her salary on a tax-advantaged basis to pay for qualified expenses, most commonly medical expenses, as part of an employer’s “ cafeteria plan,” of benefits under sec. 125 of the Internal Revenue Code. Money deposited in an employee’s FSA is not subject to income or payroll taxes. Unlike health savings accounts, funds deposited in an FSA may not be rolled over fromyear to year. Unused funds revert back to the plan administrator under what is commonly known as the “ use-it-or-lose-it” rule. 145. The Patient Protection and Affordable Care Act, Title IX, Subtitle A, sec. 9005. 146. The rules on over-the-counter medications would also apply to health reimbursement accounts (HRAs). The Patient Protection and Affordable Care Act, sec. 9003(c). 147. Social Security and Medicare Board of Trustees, “ A Summary of the 2009 Annual Reports.” 148. For a discussion of how Cato scholars believe Medicare should be reformed, see Michael Cannon, “ Medicare,” in Cato Handbook for Policy Makers , ed. Ed Crane and David Boaz (Washington: Cato Institute, 2009), pp. 125–31, http://www.cato.org/pubs/handbook/hb111/hb111-12.pdf. 149. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House speaker Nancy Pelosi, March 20, 2010. 150. Ibid. 151. Ibid. 152. Kaiser Family Foundation, “ Medicare Advantage Fact Sheet,” April 2009. 153. “ The Medicare Advantage Program,” Testimony of Peter R. Orzag, director, Congressional Budget Office, before the Committee on the Budget, U.S. House of Representatives, June 28, 2007. 154. For example, President Obama told ABC News, “ We’ve got to eliminate programs that don’t work, and I’ll give you an example in the health care area. We are spending a lot of money subsidizing the insurance companies around something called Medicare Advantage, a programthat gives themsubsidies to accept Medicare recipients but doesn’t necessarily make people on Medicare healthier. And if we eliminate that and other programs, we can potentially save $200 billion out of the health care system.” ABC W orld News Tonight , January 11, 2009. 155. Supporting Information, Official U.S. Government Site for People with Medicare, http://www.medicare.gov/MPPF/Static/TabHelp.asp?language=English&version=default&activeTab=3&planType=MA. 156. The Patient Protection and Affordable Care Act, Title III, Subtitle C, sec. 3201, as amended by the Health Care and Education Affordability Reconciliation Act, sec. 1102. 157. Testimony of Richard Foster, chief actuary, Center for Medicare and Medicaid Services, before the House Committee on the Budget, January 26, 2011, cited in Ricardo Alonso-Zaldivar, “ Medicare Official Doubts Health Savings,” Associated Press, January 27, 2011. 158. Robert Weisman, “ Harvard PilgrimCancels Medicare Advantage Plan,” Boston Globe, September 28, 2010. 159. Ibid.

160. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House speaker Nancy Pelosi, March 20, 2010. 161. “ ACR Strongly Opposes Imaging Cuts in Health Care and Education Affordability Reconciliation Act,” March 19, 2010, http://www.dotmed.com/news/story/12058/. 162. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House Speaker Nancy Pelosi, March 20, 2010. 163. Patient Protection and Affordable Care Act, Title III, Subtitle B, Part III, sec. 3131. 164. Certainly it is impossible to draw any sort of direct correlation between the amount of health care spending and outcomes. Gerard Anderson and Kalipso Chalkidou, “ Spending on Medical Care: More Is Better?” Journal of the American Medical Association 299, no. 20 (May 28, 2008): 2444–45. In fact, by some estimates as much as 30 percent of all U.S. health spending produces no discernable value. Elliott Fisher, “ Expert Voices: More Care Is Not Better Care,” National Institute for Health Care Management, January 2005. 165. See, for example, Elliott Fisher, Julie Bynum, and Jonathan Skinner, “ Slowing the Growth of Health Care Costs—Lessons from Regional Variation,” New England Journal of Medicine 360, no. 9 (2009): 849–52. 166. First, “ quality” and “ value” are not unidimensional terms. In fact, such concepts are highly idiosyncratic, with every individual having different ideas of what “ quality” and “ value” means to them, based on such things as a person’s pain tolerance, lifestyle, feeling about hospitalization, desire to return to work, and so forth. For example, a surgeon may tell you that the only way to ensure a cure for prostate cancer is a radical prostatectomy. But that procedure’s side-effects can severely impact quality of life—so some people prefer a procedure with a lower survival rate, but fewer side effects. Second, comparative effectiveness research too often has a tendency to gear its results toward the “ average” patient. But many patients are outliers, whose response to any particular treatment, for either good or ill, can vary significantly fromthe average. This matters little when the research is simply informative. However, if the research becomes the basis for more prescriptive requirements, for example prohibiting reimbursements for some types of treatment, the impact on patient outliers could be severe. In the end, the answer to Medicare and Medicaid’s open-ended subsidies is to change the structure of those programs, shifting the subsidy (to the degree there is one) directly to the consumer through some formof capped premiumsupport. The consumer would then be required to make comparative cost-value decisions. 167. Michael Cannon, “ A Better Way to Generate and Use Comparative-Effectiveness Research,” Cato Institute Policy Analysis no. 632, February 6, 2009. 168. For example, in Great Britain, the National Institute on Clinical Effectiveness makes such decisions, including a controversial determination that certain cancer drugs are “ too expensive.” Jacob Goldstein, “ U.K. Says Glaxo’s Breast Cancer Drug Isn’t Worth the Money,” W all Street Journal , July 7, 2008. 169. TomDaschle, Scott Greenberger, and Jeanne Lambrew, Critical: W hat W e Can Do about the Health-Care Crisis (New York: Thomas Dunne Books, 2008), p. 179. 170. Jennifer Haberkorn, “ GOP: Medicare Pick Favors ‘Rationing’,” Politico , May 12, 2010. 171. Patient Protection and Affordable Care Act, Title IX, sec. 9012. 172. See http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_bills&docid=f:h1enr.txt.pdf. 173. Cited in Jon Healey, “ The Healthcare ReformExposes an Extraordinary Tax Subsidy,” Los Angeles Times , March 21, 2010. 174. Patient Protection and Affordable Care Act, Title IX, sec. 9012, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, sec. 1407. 175. Kris Maher, Ellen Schultz, and Bon Tita, “ Companies Take Health Care Charges,” W all Street Journal , March 26, 2010. 176. “ Dems Cancel Hearing on Business Health Gripes,” Associated Press, April 14, 2010. 177. The Patient Protection and Affordable Care Act, Title III, Subtitle E, sec. 3403. 178. The Patient Protection and Affordable Care Act, Title III, Subtitle E, sec. 3403(c)(2)(a)(ii). 179. Social Security Act, sec. 1899A(c)(2)(A)(iii), as amended by the Patient Protection and Affordable Care Act, sec. 3403. 180. Testimony of Richard Foster, chief actuary, Center for Medicare and Medicaid Services, before the House Committee on the Budget, January 26, 2011, cited in Ricardo Alonso-Zaldivar “ Medicare Official Doubts Health Savings.”

Development, July 2007. 283. Center for Medicare and Medicaid Services, “ National Health Expenditures 2009 Highlights,” January 20, 2011, http://www.cms.gov/NationalHealthExpendData/downloads/highlights.pdf. High health care spending is not necessarily bad. To a large degree, America spends money on health care because it is a wealthy nation and chooses to do so. Economists consider health care a “ normal good,” meaning that spending is positively correlated with income. As incomes rise, people want more of that good. Because we are a wealthy nation, we can and do demand more health care. Uwe Reinhardt of Princeton University, for example, estimates that nearly half of the difference in spending between the United States and other industrial nations is due to America’s higher GDP. Uwe Reinhardt, Peter Hussey, and Gerald Anderson, “ U.S. Health Care Spending in an International Context,” Health Affairs 23 (May/June 2004): 11–12. Still, most experts on all sides of the debate recognized that the current trend in health care spending is unsustainable, and favored efforts to restrain the growth in spending. 284. Richard Foster, “ Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Amended,” Centers for Medicare and Medicaid Services, April 22, 2010. 285. Amy Finkelstein, “ The Aggregate Effects of Health Insurance: Evidence fromthe Introduction of Medicare,” Quarterly Journal of Economics 122, no. 3 (2007): 1–37. 286. Douglas Elmendorf, “ Health Costs and the Federal Budget,” CBO Director’s Blog, May 28, 2010, http://cboblog.cbo.gov/? utm_source=Newsletter&utm_medium=Email&utm_creampaign=Fix%2BHealth%20Care&p=1034. 287. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to Senate Majority Leader Harry Reid, March 11, 2010. 288. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House Speaker Nancy Pelosi, March 18, 2010. Note that CBO calls this “ a preliminary estimate” and it may be revised in the future. 289. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House speaker Nancy Pelosi, March 18, 2010. 290. The February 2010 deficit was $220.0 billion, the highest monthly deficit in U.S. history. “ Another Record Month of Red Ink: Government Racked Up Record Monthly Deficit of $220 Billion in February,” ABCNews.com, March 10, 2010, http://blogs.abcnews.com/politicalpunch/2010/03/another-record-month-of-red-ink-government-racked-up-record-monthly-deficitof-220-billion-in-februa.html. 291. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to House speaker Nancy Pelosi, March 20, 2010. 292. Balanced Budget Act of 1997, sec. 4502. 293. Congressional Budget Office, “ Summary of Medicare Physician Payment ReformAct of 2009,” November 4, 2009. 294. Cited in Shawn Tully, “ Health Care: Going fromBroken to Broke,” Cnnmoney.com, March 12, 2010. 295. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to Rep. Paul Ryan, March 19, 2010. Note that the change is not a matter of simply adding the cost of the doc-fix to the cost of the health bill, because of the interaction of the doc-fix with changes in the Medicare Advantage program. Some proponents of the bill argue that it is unfair to assign the cost of the doc-fix to the health care bill since it almost certainly would have occurred anyway. See, for example, Ezra Klein, “ One More Time with the Medicare Doc-Fix,” Washington Post Online, April 28, 2010, http://voices.washingtonpost.com/ezraklein/2010/04/one_more_time_with_the_medicar.html. But the question isn’t one of assigning cost, but whether projections of the bill’s cost and impact on future deficits uses an unrealistically low baseline. 296. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to Rep. Jerry Lewis, May 11, 2010. 297. Authors calculations, assuming a 6 percent growth rate in both revenues and expenditures after 2019. 298. “ 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” Table III.C15. 299. Perhaps the clearest explanation appeared in the Clinton Administration’s FY2000 budget, in reference to the Social Security Trust Fund: “ These Trust Fund balances are available to finance future benefit payments . . . but only in a bookkeeping sense. . . . They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing fromthe public, or reducing benefits or other expenditures. The existence of Trust Fund balances, therefore, does not by itself have any impact on the government’s ability to pay benefits.” Executive Office of the President of the United States, Budget of the United States Government, Fiscal Year 2000,

Analytic Perspectives , p 337.

300. Foster, “ Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Amended.” 301. Letter fromDouglas Holtz-Eakin and 200 economists to House and Senate leadership, January 18, 2001. 302. Robert Reischauer “ An Analysis of the Administration’s Health Proposal,” Congressional Budget Office, February 1994. 303. Michael Cannon, “ ObamaCare’s Cost Could Top $6 Trillion,” Cato @ Liberty Blog, November 27, 2009, http://www.cato-atliberty.org/2009/11/27/obamacares-cost-could-top-6-trillion/. 304. Stephen Dinan, “ Entitlements Have a History of Cost Overruns,” W ashington Times , June 16, 2006. 305. Ibid. 306. Ibid. In fairness, it should be pointed out that, so far, Medicare Part D is costing less than estimated. 307. Shawn Tully, “ Documents Reveal AT&T, Verizon, Others Thought about Dropping Health Care Plans,” Fortune, May 6, 2010. 308. Douglas Holtz-Eakin and Cameron Smith, “ Labor Markets and Health Care Reform: New Results,” American Action Forum, May 2010. 309. Congressional Budget Office, “ Budget and Economic Outlook: Fiscal Years 2011 to 2021,” January 2011. 310. See http://www.whitehouse.gov/omb/assets/omb/financial/reports/citizens_guide.pdf. 311. “ Obama Health Care Plan,” MemorandumfromDavid Blumenthal, David Cutler, and Jeffrey Liebman, 2007. 312. “ Will Health Care Bill Lower Premiums?” Associated Press, March 17, 2010, http://www.cbsnews.com/stories/2010/03/17/politics/main6306991.shtml. 313. “ A Comprehensive Survey of Premiums, Availability, and Benefits,” American Health Insurance Plans, October 2009. It should be noted that premiums differ significantly fromstate to state. For example, the premiumfor a family health plan in Iowa is just $5,609, while in New York a similar plan is $13,296. Premiums also vary significantly on the basis of age, ranging from$1,350 for persons under age 18 to $5,755 for persons aged 60–64, and according to such factors as co-payments and deductibles. 314. John Fritze, “ Average Family Health Insurance Policy $13,375, Up 5%,” USA Today, September 16, 2009, citing survey data fromthe Kaiser Family Foundation. 315. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to Sen. Evan Bayh, November 30, 2009. Although this was a November estimate, and CBO and has not updated it to reflect the final bill language, CBO noted in May 2010 that “ the effects of the enacted legislation are expected to be quite similar,” http://www.cbo.gov/publications/collections/health.cfm. Premiums for employer policies usually have lower deductibles and more comprehensive benefits, accounting for the higher employer-based premiums. Premiums for identical policies are generally higher in the nongroup market. 316. Letter fromDouglas Elmendorf, director, Congressional Budget Office, to Sen. Evan Bayh. 317. Ibid. 318. Ibid. 319. Ibid. 320. Ibid. 321. “ U.S. Health Care Cost Rate Increases Reach Highest Levels in Five Years, According to New Data fromHewitt Associates,” press release, September 27, 2010. 322. Janet Adamy, “ Health Insurers Plan Hikes,” W all Street Journal , September 7, 2010. 323. White House, “ Remarks by the President at the Annual Conference of the American Medical Association,” press release, June 15, 2009, http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-to-the-Annual-Conference-of-the-AmericanMedical-Association/.

324. Testimony of Richard Foster, chief actuary, Center for Medicare and Medicaid Services, before the House Committee on the Budget, January 26, 2011, cited in Ricardo Alonso-Zaldivar, “ Medicare Official Doubts Health Savings.” 325. The White House, “ Remarks by the President in Town Hall Meeting on Health Care,” Office of the Press Secretary, June 11, 2009, http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-in-Town-Hall-Meeting-on-Health-Care-in-GreenBay-Wisconsin/. 326. Mark Thiessen, “ Palin Says Obama’s Health Care Plan is ‘Evil’,” Associated Press, August 8, 2009. 327. In the long run, the only way to spend less on health care is to consume less health care. The real health care debate, therefore, is not about whether we should ration care, but about who should ration it. Thus, while free-market health care reformers want to shift more of the decisions (and therefore the financial responsibility) back to the individual, this legislation rejects that approach (see the discussion on consumer-directed health care above) and therefore would ultimately put the government in charge of those decisions. 328. Chapter 305 of the Acts of 2008: An Act to Promote Cost Containment, Transparency, and Efficiency in the Delivery of Quality Health Care, September 10, 2008. 329. Report of the Special Commission on the Health Care Payment System, March 25, 2009 (emphasis added). 330. http://healthcarelawsuits.org/.

Chapter 22

The New Health Care Law: What a Difference a Year Makes Cato Policy Forum

When President Obama signed the Patient Protection and Affordable Care Act into law on March 23, 2010, few would have predicted what happened in the following year. Opposition to the law has led to Republican gains in Congress, a House vote to repeal it, and two federal courts striking down part or all of the law as unconstitutional. At a half-day Cato Institute conference, held one year after the House of Representatives passed the law, Kavita Patel, M.D., managing director of delivery-system reform at the Engelberg Center for Health Care Reform at the Brookings Institution; Michael F. Cannon, director of health policy studies at the Cato Institute; Ron Pollack, executive director of Families USA; and Douglas Holtz-Eakin, former director of the Congressional Budget Office, debated how the law has already affected America’s health care sector, labor markets, and the federal budget, and what impact it will have in the future. KAVITA PATEL: My background is in primary care as an internal medicine physician, and that’s where we often talk about quality, delivery-system reforms, and some of the actual transformations in the Affordable Care Act. We’re seeing some of those changes right now—in medical homes, patient care coordination, transitions in care—by virtue of the fact that one of the things we tried to do in the ACA was show that those are the promising areas for the next decades. A lot of us working on the health care law knew that there were mechanisms—bureaucratic, statutory, and otherwise—preventing the Centers for Medicare and Medicaid Services from rewarding places doing “innovative” things. Out of that was born the Centers for Medicare and Medicaid Innovation, with $10 billion for projects, research, and evaluation. One of the first things out the gate from that $10 billion—over 10 years—was the promotion of primary care and medical homes at the state level. This is a population for which innovation is desperately needed. In terms of quality, we’ve known now for the last seven or eight years that the quality of care in our country has been, at most—on average—“good” about half the time. If you’re in Las Vegas, that may be decent odds. If you’re dealing with health care, that’s unacceptable. So, in an effort to make sure that we understand the gap—but also so that we can do something about it—we really need to understand what works. That means not just putting money into data on websites, but actually investing in effectiveness, in comparing research that looks at treatments and processes of care—as well as establishing guidelines on how our evidence is used by clinicians. Streamlining and coordinating what the government does was something that all of us thought were broken and dysfunctional. One year later we’ve already seen agencies coordinating and making their data accessible— agencies that had not spoken to each other before and historically had not necessarily even traded data or had their data accessible to the public.

Looking forward, the key changes are not spelled out in much minutiae in the law, offering an opportunity for not only interpretation, but also for action and decision making on behalf of health care providers. Those changes impact accountable-care organizations, medical homes, value-based purchasing, a lot of the insurance design benefits that we’re hoping that we will see in Medicare, as well as some of the statebased Medicaid contracts. That’s exactly where the promise of not only cost containment and bending the cost curve will come from, but also the true promise of delivering the right care, at the right time, in the right place. MICHAEL CANNON: ObamaCare is no more going to improve the quality of health care than its consumer protections are going to protect patients. Most of the provisions that are supposed to improve the way we deliver health care were not specified in the law. Basically what happened, we created a Center for Medicare and Medicaid Innovation to run pilot programs and experiment with different ways of setting prices and different financial incentives—different terms of exchange—to see if providers will deliver care that is more coordinated. The problem with these pilot programs—and this approach for reforming health care—is that we have tried it and it has never worked. Medicare has been trying pilot programs for its entire existence, and either those pilot programs fail or, if they succeed in either improving the quality of care or reducing the cost of care, are blocked by the corners of the health care industry whose income streams those innovations threaten: the low-quality providers or high-cost providers who will see Medicare revenues delivered someplace else. Under lobbying pressure, these pilot programs are eliminated. There’s an article in the most recent issue in the journal Health Affairs that polled physicians in Switzerland and asked them, “What would it take for you to provide more coordinated care than what you’re providing right now?”—to join into the sort of accountable- care organizations that are discussed in this law? The Swiss doctors said they would want a 40 percent raise before they took these steps to improve the quality of care. That’s the sort of resistance that you’re going to see to these pilot programs. This law will not improve the cost of medical care or health insurance, either. The individual mandate, portions of which began taking effect on September 23, 2010, is already increasing the cost of health insurance for millions of Americans. One insurance company reported those provisions were forcing it to increase premiums on some customers by up to 30 percent. Another reason for the backlash is that many believe the law is overkill. If you look at the preexistingcondition insurance plans that the law has set up in each state, they’ve attracted just 12,000 enrollees at last count, or three percent of the 375,000 projected to enroll. Since the primary motivation of the law was to protect people with preexisting conditions, that suggests that it wasn’t necessary to conscript 200 million Americans into a compulsory health insurance scheme to solve that problem. The projections that ObamaCare will permanently eliminate 800,000 jobs—not to mention any temporary job losses—is striking fear in those battered by the recession. Finally, many Americans are taking this law personally. The president promised to put an end to the game playing, but then made backroom deals with the drug lobby and Walmart, while Senate Democrats who drafted this law used tax dollars to buy votes in support for it. Americans watched Kathleen Sebelius repeatedly censor insurers who disagreed with her. They saw their tax dollars buy ads where Andy Griffith used “weasel words”—those aren’t my words, those are from FactCheck.org— to mislead seniors about how this law will affect their coverage. They hear the president continue to say things that they know are untrue, that his own advisers in some cases—and nonpartisan observers in others—have

discredited: for instance, ObamaCare will allow Americans to keep their coverage, reduce costs, and reduce the deficit. We heard that the individual mandate was a tax. Then the president told us that it was not a tax. Then his Justice Department went into court to argue that, in fact, it is a tax. At a certain point, people start to feel insulted. Newt Gingrich predicted that this law would be repealed by April 2013. I don’t know if anyone can know if that’s true, but I’m struck by two things. The first is that if Congress doesn’t repeal this law, we’ll be back here on the second anniversary of ObamaCare, the fifth anniversary of ObamaCare, the 10th anniversary of ObamaCare—having conferences like this one, in rooms like this one, in Washington, D.C., and elsewhere in the country. We’ll be asking why health care spending is still rising out of control, why we still don’t have coordinated care, accountable-care organizations, comparative-effectiveness research that helps us to improve the quality of care, and health information technologies; and we’ll be questioning why insurers are being rewarded by ObamaCare’s price controls for avoiding or mistreating the sick. The second thing that I’m struck by is just how plausible Gingrich’s prediction is. It’s certainly far more plausible than anyone thought one year ago today. RON POLLACK: We have already seen significant and helpful changes due to the Affordable Care Act. So far, much of the conversation about the Act has focused on matters that go into effect in 2014. But there are a number of things that have already gone into effect, and they are very significant and helpful. Let me pick out the more salient ones. In no particular order they include: Young adults—who turn out to be the age most likely to be uninsured—now can continue to stay on their parents’ policy until their 26th birthday. I don’t know how many young adults have already availed themselves of such coverage, but they can now get coverage through their parents. (There’s a moral here: Be good to your parents.) Second, with respect to seniors, some have already seen the benefit of this legislation in two different respects. One of them is helpful to those who currently fall into the huge prescription drug gap in coverage, the so-called “doughnut hole,”— where, after seniors and people with disabilities in Medicare have spent a certain amount of money, they fall into a no-coverage zone. In today’s dollars, once a senior has spent $2,840 in drugs during the year, the gap in coverage begins, and it doesn’t end until they’ve spent $6,484—a gap of $3,644 dollars. With each passing year that gap is supposed to get larger. Last year, people who fell in the doughnut hole received a modest $250 check. This year, anyone falling into the doughnut hole can purchase brand name drugs with a 50 percent discount. In other words, somebody who falls into the doughnut hole can receive a $1,822 benefit to help them afford their drugs. Seniors also receive the benefit of free preventive care, so that Medicare becomes more of a preventive and primary care system, not just a sickness care system. A third group aided is small business owners. They can receive a tax credit of up to 35 percent of the costs of covering their workers if they have fewer than 25 workers. I don’t yet know how many have availed themselves of this tax-credit benefit, but there are over 4 million who qualify for it. Children are another group already helped. They are the first to receive the benefit of insurance-related protections such that they cannot be denied coverage due to a preexisting condition. An insurance company can’t deny coverage just because a child has asthma or diabetes. This important protection is extended to adults in 2014. The Affordable Care Act is also providing reinsurance for early retirees between the ages of 55 and 64, and this enables more and more companies to continue providing coverage for their early retirees. Already in effect is a prohibition on lifetime limits on insurance benefits. As a result, somebody with a catastrophic illness (such as cancer) or who gets into a bad accident will no longer be bankrupted because

he or she has to spend money totally out of pocket once reaching a lifetime cap. Under the Affordable Care Act, insurance companies can no longer take away your coverage once you get sick if you have paid your premiums all along. In the past, there have been a number of insurance companies that rescinded policies when people got sick. That no longer is lawful, and that is providing new, important protections. In the longer run, the Affordable Care Act makes huge progress in expanding health coverage for people who are uninsured. It does so by providing direct help to people with incomes below 400 percent of the poverty level (which will help a family of three with approximately $75,000 in income or less). Additionally, the Act expands the safety-net Medicaid program to cover people and families with incomes below 133 percent of the federal poverty level. As a result largely of these two improvements, the Congressional Budget Office tells us about 34 million people who don’t have coverage today will receive it. It is possible that even more than 34 million people will gain coverage, depending on how well enrollment and retention systems are established through regulations and state implementation. This coverage expansion is worthy of strong support. DOUGLAS HOLTZ-EAKIN: One of the things that has been forgotten, in the course of the debate and the enactment, and now the anniversary, is that there was a time several years ago, beginning in 2009, when there was a bipartisan consensus that America needed sensible health care reforms that would control the growth of spending, improve the delivery system, and expand coverage. What actually happened was a highly partisan activity that has given me just one more piece of evidence that all partisan laws end up being bad policy. It is unwise in a democracy to push through large legislation on one party’s votes. Those laws are never infused with the best ideas of both sides, and as a result they are not as good, and they immediately become objects for overturning. It doesn’t serve our country—which needs a durable and functional health care system—to undertake this kind of activity, and so I expect us to be back again in the future, discussing either the demise of the Affordable Care Act or alternatives that build upon its shaky foundation. What are the problems with that foundation? Michael Cannon asked me to talk about the ACA from the perspective of budget, labor market, and economic policy, and there I think it is indeed a dramatically dangerous piece of legislation at the wrong point in our history. I hope it is now well understood that the federal government’s budget is on the road to hell. There is no polite way to describe why the world’s largest economy has placed itself on a trajectory that looks like a third-world debt crisis. It is for that reason mystifying to me when the very prosperity and freedom that has built our economy is put at a risk by taking a decisive step in the wrong direction, at a time when we already have deep problems. There is no way you can pretend that the Affordable Care Act will improve the government’s fiscal or budgetary condition. It sets up two new entitlement spending programs: insurance subsidies for those in the exchanges, and the so-called “Class Act,” a long-term care insurance program—both of which the CBO estimates will grow at an average of eight percent per year annually as far as the eye can see. Tax revenues will not grow at eight percent a year annually as far as the eye can see; the economy will not grow at a rate eight percent a year annually as far as the eye can see; there will be no way either of those things will be able to keep up with those spending demands, and the budget will deteriorate, not improve. You can paper that over with a variety of budgetary gimmicks, as has been done with this legislation. You can count on savings that will never appear in the Medicare program, because we haven’t reformed the Medicare program. Its business law remains the same, its costs will be the same, its providers will need the same money, or we just won’t cover the beneficiaries. And I think when Congress is faced with

that choice, it will cover the beneficiaries. You can’t just simply pretend that the Class Act will collect money inside the budget window and not pay out benefits past the budget window. You cannot leave out the annual appropriations that are necessary to set up and run the program. You cannot do all the things that they did, and somehow trick people into believing this is a good step from a budgetary point of view. Another big risk is that we’ll end up with more people in the exchanges— because employers can do arithmetic. They understand that there is so much taxpayer money on the table in those exchanges that it is entirely possible for them to drop their coverage, particularly for anyone under 300 percent of the federal poverty line. It is a no-brainer to drop the coverage, pay the penalty, give the worker a raise, and allow the worker to take the post-tax wage plus the subsidies and buy insurance at the exchanges that is just as good or better. If you take the population that’s eligible for that kind of bargain, and assume that not even all of them do it, you can double the $1 trillion cost easily over the first 10 years, or triple it. I would have loved to have stood here on the first anniversary of a bipartisan health care bill that took care of the costs problems and enhanced the prospect for coverage in the United States. Instead, we’re celebrating the anniversary of something which represents another missed opportunity in health care reform in the United States, a dangerous step from an economic and budgetary policy point of view, and something that really cannot survive. And regardless of what we call it—repeal, replace, or simply throw up our hands and pray—it will not be this way in the future. This article appeared in Cato Policy Report (May/June 2011).

Chapter 23

ObamaCare—The Way of the Dodo by Michael F. Cannon

If you are reading this, chances are good you have traded the luxury of newspapers for medical texts, 24-hour shifts, and chronicling every nanosecond of your day. So let’s recap what’s going on in the world. The U.S. government is borrowing roughly 40 cents of every dollar it spends, creating a budget deficit of $1.3 trillion.1 Uncle Sam has been at this for some time; he is now $10 trillion in the hole. That equals roughly two-thirds of everything the United States produces in a year. 2 If we extend current federal tax and spending policies into the future, the size of the federal debt becomes cataclysmic. Think “Greece.” Few recognize the extent of the danger, because Congress has cleverly cooked the books to make future debt levels appear merely horrifying. Let’s pick one of Congress’s accounting frauds at random: the “sustainable growth rate” (SGR) formula. This little gremlin cuts Medicare payments to physicians every year on January 1. Or it would, except every year these cuts have come due, Congress has postponed them. But so long as hundreds of billions of dollars of future cuts remain on the books, future deficits and debt appear that much smaller. Everyone knows Congress is going to postpone those cuts when docs and seniors start complaining. But by pretending that it won’t, Congress makes the federal government’s finances look better. (The real genius of the SGR is that the cumulative effect of pushing all postponed cuts into future years both preserves the SGR’s debt-concealing power and ensures that physicians will grow increasingly desperate to make campaign contributions with each passing year.) Returning to current events, the unemployment rate has been stuck above 8 percent since January 2009,3 despite numerous government stimulus packages. Since World War II, American voters have ousted every president who presided over an election-day unemployment rate above 7.2 percent.4 It is now 9.1 percent.5 The current White House occupant recommends another government stimulus package. Stimulating both the federal debt and the unemployment rate is the Patient Protection and Affordable Care Act of 2010, better known as “ObamaCare,” a moniker even its namesake now embraces. During the initial debate over ObamaCare, House Speaker Nancy Pelosi (D-CA) famously said, “We have to pass [it] so you can find out what’s in it.”6 One irreverent heir to Hippocrates quipped, “That’s what I tell my patients when I ask them for a stool sample.”7 The similarities scarcely end there. Shortly after the signing ceremony, the New York Times noticed that ObamaCare actually bars members of Congress from participating in the Federal Employees Health Benefits Program, throwing

them out of their health plans and leaving them with no coverage.8 Oops. The Obama administration quietly ignored this inconvenient part of the law, thereby holding the political class harmless and allowing President Obama to keep his promise that every American would be able to keep his or her current health plan. Or at least, every member of Congress. Things ended differently when the law pushed carrier Principal Financial Group (PFG) to exit the market, curing nearly one million ordinary Americans of the preexisting condition known as being able to keep your health plan.9 Quite unlike how it responded when the law threatened members of Congress, in this case the Obama administration did not suspend, or even bother to discern, the responsible provisions of the law. Evidently, health care “reform” is only for the little people. The most likely culprit behind PFG’s exit was ObamaCare’s minimum “medical loss ratio” rule, which requires health insurance carriers to spend at least 80 percent of premium revenue on medical care and quality-improvement activities (as opposed to “administrative costs”) or issue rebates to their customers. A study sponsored by the Robert Wood Johnson Foundation and published in the American Journal of Managed Care estimates this one requirement will impel so many carriers to leave the market that hundreds of thousands more Americans will lose their current health insurance. That includes 155,000 or so seriously ill Americans, who were protected against premium spikes by their current health plans, but may not be able to afford coverage through any other carrier. Since that study looked only at Americans who buy their own insurance (just 10 percent of the private market) and excluded California (home to America’s largest “individual” market), the actual number of seriously ill Americans who lose their coverage may be higher.10 This 2,000-page congressional emanation also creates two new entitlement programs. The Obama administration confessed that one of them, a new long-term care entitlement known as the “Class Act,” is “totally unsustainable.”11 The Department of Health and Human Services (HHS) shut down the office responsible for implementing the Class Act, reassigned its staff elsewhere, and asked Congress not to fund it. When reports emerged that HHS was scuttling the Class Act, the agency naturally denied the charge.12 Shortly thereafter, HHS announced it was scuttling the Class Act. 13 ObamaCare supporters were quick to cite the Class Act’s spectacular failure as evidence that he law works.14 Naturally, the White House opposes repeal.15 ObamaCare’s other new entitlement program offers considerable subsidies to low-income workers who migrate into ObamaCare’s health insurance “exchanges.” It creates even larger incentives for employers to lend a hand, whether by dropping their health benefits or by firing these workers and rehiring them as contractors. Those (perverse) incentives, plus the threat of ObamaCare’s employer mandate, plus the added labor costs stemming from the law’s coverage mandates, have left employers wary of hiring until either the Obama administration reduces the uncertainty by assigning values to these variables, or Congress or the Supreme Court reduces the uncertainty by eliminating them. This entitlement will also prove unsustainable when its cost turns out to be higher than projected, yet still fails to make ObamaCare’s mandatory health insurance affordable (see below). Even if the official spending projections are correct, ObamaCare will add another $1 trillion of new government spending during its first 10 years (actually during the first 6;16 another accounting gimmick). One thing it doesn’t spend money on: eliminating the SGR cuts. Congressional Democrats promised the American Medical Association et alia a permanent SGR fix in return for supporting ObamaCare.17 That

was 2 years ago. Reports that the deal included a bridge in Brooklyn have not been confirmed. ObamaCare finances half of that $1 trillion of new spending with tax hikes on everything from tanning beds to health insurance to pharmaceuticals. It increases the Medicare payroll tax—in the sense that it applies this tax to non-payroll income, and uses the revenue for things other than Medicare.18 ,19 It finances the other half-trillion dollars of new government spending with promised Medicare cuts that are as bogus as the SGR—but sure do make future deficits look smaller. When ObamaCare’s first batch of mandates took effect in September 2010, carriers notified their customers how much premiums would be raised as a result of these mandates. One Connecticut insurer put the hidden ObamaCare tax in the range of 20–30 percent of premiums.20 Naturally, HHS Secretary Kathleen Sebelius threatened carriers with bankruptcy if they continued furnishing cost estimates.21 The notifications stopped. Earlier this year, the chief Medicare actuary exposed another unknown and (one hopes) unintended feature of the law when he discovered it opens Medicaid to millions of middle-class early retirees.22 More recently, observers found cracks in the new health insurance exchanges, which under the law may be established either by states or, should they decline, the federal government. With many states balking, Politico revealed that the law doesn’t actually provide any funding for HHS to create exchanges.23 And there is exactly zero chance of any such funding emerging from the GOP House. Legal scholars discovered an even bigger glitch that could scuttle both the entitlement to premium assistance and the employer mandate. It turns out the law only authorizes premium assistance in staterun exchanges. It does not authorize such assistance to those purchasing coverage in a federally created exchange.24, 25 There is more to this glitch than meets the eye. With the subsidies, six in ten people in Wisconsin’s individual market will still see their premiums go up by an average 31 percent, according to MIT economist Jonathan Gruber, one of the law’s biggest cheerleaders. (So much for those subsidies making coverage affordable.) But suppose a state refuses to create an exchange and HHS (somehow) creates one. Remember, the IRS has no legal authority to offer premium assistance in a federally run exchange. Gruber estimates that without the law’s subsidies, nine in ten will see their premiums jump by an average of 41 percent.26 In what has become a recurring theme, the IRS says it will ignore what the law says and disburse those unauthorized subsidies anyway. 27 (Given the Obama administration’s proclivity for doing whatever it pleases, regardless of what the law says, one wonders why it even waited for Congress to pass a health care law in the first place.) But even this power play may not be enough to save this second entitlement program. Or the law’s “employer mandate.” If the Obama administration provides unauthorized premium assistance through federally created exchanges, then some of those subsidies will, under the law’s employer mandate, trigger penalties against employers. Employers would then have standing to challenge the unauthorized subsidies in court.28 In states that decline to create exchanges, those lawsuits could scuttle not only the unauthorized premium assistance but also the employer mandate. In an ideal world, doctors would be looking over their shoulders at competitors who are innovating to drive down costs. That’s how markets make health care affordable today for people who couldn’t afford it yesterday. Instead, doctors are looking over their shoulders at federal bureaucrats, who may whack physicians-cum-employers with an employer mandate, and in particular at politicians, to whom doctors

must pay tribute lest the politicians cut physicians’ pay. ObamaCare supporters are ignoring the federal government’s dire fiscal situation; ignoring the law’s impact on premiums, jobs, and access to health insurance; ignoring that a strikingly similar law has sent health care costs higher in Massachusetts;29 ignoring public opinion, which has been solidly against the law for more than 2 years; ignoring the law’s failures (when they’re not declaring them successes); and ignoring that the law was so incompetently drafted that it cannot be implemented without shredding the separation of powers, the rule of law, and the U.S. Constitution itself. Rather than confront their own errors of judgment, they self-soothe: The public just doesn’t understand the law. The more they learn about it, the more they’ll like it. Such behavior can only be explained by the fact that ObamaCare supporters are part of a political movement that has fought for more than a century to secure a government guarantee of access to medical care for everyone. They have suffered a century of disappointments, and have never been so close to achieving their goal—which, to be clear, is not so much access to care as it is the guarantee. They will cling to this achievement, such as it is, to the bitter end. To modify an old joke: What’s the difference between an ObamaCare supporter and a Rottweiler? The Rottweiler eventually lets go. This denial takes its most sophisticated form in the periodic surveys that purport to show how those silly voters still don’t understand the law. (In the mind of the ObamaCare zombie, no one really understands the law until they support it.) A prominent health care journalist had just filed her umpteenth story on such surveys when I asked her, “At what point do you start to question whether ObamaCare supporters are just kidding themselves?” Her response? “Soon . . . ” This article appeared in the November 2011 edition of Virtual Mentor. REFERENCES 1. Congressional Budget Office. The budget and economic outlook: an update (2011). http://www.cbo.gov/ftpdocs/123xx/doc12316/08-24-BudgetEconUpdate.pdf. Accessed October 20, 2011. 2. Congressional Budget Office. CBO’s 2011 long-term budget outlook. http://cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-Term_Budget_Outlook.pdf. Accessed October 20, 2011. 3. U.S. Department of Labor Bureau of Labor Statistics. Databases, tables, and calculators by subject: labor force statistics from the current population survey. http://data.bls.gov/timeseries/LNS14000000. Accessed October 20, 2011. 4. Benen S. Presidents, unemployment rates, and context. Washington Monthly. June 2, 2011. http://www.washingtonmonthly.com/politicalanimal/2011_06/presidents_unemployment_rates029975.php. Accessed October 20, 2011. 5. U.S. Department of Labor Bureau of Labor Statistics. Labor force statistics from the current population survey. http://www.bls.gov/cps/. Accessed October 20, 2011. ObamaCare will give the unemployment rate a permanent little boost. The CBO projects the law eliminate an estimated 800,000 jobs. (Anderson JH. CBO director says Obamacare would reduce employment by 800,000 w o r k e r s . http://www.weeklystandard.com/blogs/cbo-director-says-obamacare-would-reduceemployment-800000-workers_547288.html. Weekly Standard. February 10, 2011. Accessed October 27, 2011.) The fashionable retort is to note that this effect “primarily comes from workers

who choose not to work because they no longer have to work at jobs just for the health insurance.” (Holan AD. Michele Bachmann says Obamacare will kill 800,000 jobs. http://www.politifact.com/truth-o-meter/statements/2011/jun/14/michele-bachmann/michelebachmann-says-obamacare-will-kill-800000-j/. PolitiFact. June 13th, 2011. Accessed October 27, 2011.) That defense fails for two reasons. First, a “job” is when Smith and Jones exchange labor for money. It doesn’t matter whether Jones withdraws the money or Smith withdraws the labor. Either act eliminates a job. Second, it’s an odd defense of a law to say it encourages people to consume without producing. 6. Texas GOP says Speaker Nancy Pelosi said people will know content of terrible health-care plan after it passes. PolitiFact. March 15, 2011. http://www.politifact.com/texas/statements/2010/mar/15/republican-party-texas/texas-gop-saysspeaker-nancy-pelosi-said-people-wi/. Accessed October 20, 2011. 7. This quip came to me second-hand, through a reporter. I cannot guarantee it originated with a physician, but the gallows humor is strongly suggestive. 8. Pear R. Baffled by health plan? So are some lawmakers. New York Times . April 12, 2010. http://www.nytimes.com/2010/04/13/us/politics/13health.html. Accessed October 20, 2011. 9. Johnson A. Principal Financial quits writing health-care policies. October 1, 2010. http://online.wsj.com/article/SB10001424052748704789404575524281126700388.html. Accessed October 20, 2011. 10. Abraham JM, Karaca-Mandic P. Regulating the medical loss ratio: implications for the individual market . Am J Managed Care. 2011:17(3):211-218. http://www.ahipcoverage.com/wpcontent/uploads/2011/03/AJMC-MLR-Paper.pdf. Accessed October 20, 2011. 11. Roy A. Sebelius: CLASS Act is “totally unsustainable,” mandate possible. http://www.forbes.com/sites/aroy/2011/02/23/sebelius-class-act-is-totally-unsustainable-mandatepossible/. Forbes. February 23, 2011. Accessed October 20, 2011. 12. The definition of insanity: why no one wants to repeal a program that everyone knows is a fraud. Wall Street Journal. October 4, 2011. http://online.wsj.com/article/SB10001424052970204422404576594571813960198.html. Accessed October 20, 2011. 13. Pear R. Health law to be revised by ending a program. New York Times . October 14, 2011. http://www.nytimes.com/2011/10/15/health/policy/15health.html. Accessed October 20, 2011. 14. Klein E. What the CLASS Act says about health-care reform. Washington Post. October 17, 2011. http://www.washingtonpost.com/blogs/ezra-klein/post/what-the-class-act-says-about-health-carereform/2011/08/25/gIQA8cL0rL_blog.html. Accessed October 20, 2011. 15. Pecquet K. Obama opposed repeal of healthcare program suspended last week. The Hill. October 17, 2011. http://thehill.com/blogs/healthwatch/health-reform-implementation/187949-white-houseopposes-formal-class-act-repeal. Accessed October 20, 2011. 16. Congressional Budget Office. Testimony: statement of Douglas W. Elmendorf, director: CBO’s analysis of the major health care legislation enacted in March 2010 (March 30, 2011). http://cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf. Accessed October 20, 2011. 17. Laugesen MJ. Civilized medicine: physicians and health care reform. J Health Polit Policy Law. 2011;36(3): 507-512.

By now, probably everyone has heard these old Obamacare saws: March 9, 2010–“We have to pass the bill so that you can find out what is in it.” (House Speaker Nancy Pelosi) March 28, 2010–“As more and more people get to understand what’s in this bill, people are going to like it.” (Pennsylvania Gov. Ed Rendell) August 4, 2010–“It’s very obvious that people have a lack of understanding of our health care reform bill . . . The more people learn about this bill, the more they like it . . . The trend is turning all over America today . . . Once you explain what’s in the bill, the American people of course like it.” ( Senate Majority Leader Harry Reid) Here’s how those predictions have borne out:

Thus supporters have now gone from claiming that of course the public will love Obamacare to declaring, We need to make people dependent on government for their health care pronto, or Obamacare is sunk: January 19, 2012–“The more we educate people about the law, the more they’ll be able to take advantage of the benefits. The more they take advantage of the benefits, the harder it will be for opponents to take those benefits away. Once you have something and you like it and you’re using it, you will fight with your own member of Congress to keep it.” (HHS Secretary Kathleen Sebelius) Obamacare will not benefit people by lowering the cost of medical care, as even Sebelius must know by now. The only way Obamacare will “benefit” anybody is by making him or her the recipient of an explicit or implicit government transfer. That is, Obamacare is going to rob Peter to subsidize Paul. Obamacare’s survival depends on making Paul dependent on that government transfer. I’m just surprised Sebelius is being so up front about it. This article appeared on January 20, 2012 on [email protected]

VERSUS THE CONSTITUTION Chapter 25

Bill ‘Reforms’ Constitution by Robert A. Levy and Michael F. Cannon

The Democrats’ health-care overhaul asserts for Congress a power that the framers of the Constitution never envisioned: the power to force Americans to purchase unwanted goods or services. With all the hype, one might think the “public option” is the linchpin of the Democratic health plan. Yet Congress has created entitlements in the past, and enrollment in a public option would not be mandatory (at least not initially). The legislation’s centerpiece is really the “individual mandate”—an unprecedented legal requirement that Americans purchase health insurance under penalty of law. The mandate is nearly universal, and without it, as President Obama admitted to a joint session of Congress, the legislation would fall apart. But is it constitutional? The Constitution grants Congress the power to regulate interstate commerce. Does that power extend to behaviors, such as not purchasing health insurance, that are neither interstate nor commerce? If you think the answer is a self-evident “no,” then you haven’t been following the Supreme Court over the past seven decades. Instead of serving as a shield against states that attempt to interfere with interstate commerce, the commerce power today has become a sword that the federal government wields in pursuit of a boundless array of socio-economic programs. The Supreme Court has held that the power to regulate interstate commerce extends to trade within a single state if it has a substantial effect on interstate markets. Even noncommercial activities within a state can be restricted if they threaten to undercut federal regulation of interstate markets. That’s the framework into which Senate Majority Leader Harry Reid (D., Nev.) shoehorned his health bill. What he came up with is a paper-thin pretense for asserting extra-constitutional powers. First, Reid tried obfuscation. Tucked away in that 2,074-page bill is a citation of a 1944 Supreme Court ruling that deemed insurance to be interstate commerce. Reid conveniently omitted any reference to the McCarran-Ferguson Act passed the very next year, which gave states absolute authority to regulate health insurance. That law’s effect has been to bar individuals from purchasing health insurance across state lines. Accordingly, there is no interstate market to be affected, much less undercut. Reid’s second ploy was to pretend that forcing Americans to purchase a product that many of them do not want is integral to the regulation of our national health-care system. Perhaps so, but only if the Constitution’s commerce clause, which was intended to eliminate state barriers to interstate trade, becomes the vehicle by which the federal government can compel people to engage in intrastate trade. Not even the Supreme Court’s tortured commerce-clause jurisprudence goes that far.

If Congress were interested in using the commerce clause for its intended purpose, we would be debating the Health Care Choice Act, which would permit the interstate purchase of individual health policies. The Democrats, however, bottled up that bill in committee. They would rather exploit the cartelization of health insurance in selected states to argue for a government-run insurance company. Never mind that a major reason for those cartels is the prohibition against purchasing insurance across state lines. Finally, Reid would enforce this unconstitutional mandate with an unconstitutional tax. The Senate bill attaches a penalty for not complying with the mandate to the Internal Revenue Code. But the penalty is not based on income, so it’s not an income tax. And it’s not based on the value of the policy not purchased, so it’s not an excise tax. Instead, the tax is a fixed amount based on family size. That means it’s levied per person and therefore a “direct tax” under the Constitution, which requires that such taxes be apportioned among the states according to their population, as determined by the census. The individual mandate would extend the dominion of the federal government to virtually all manner of human conduct—including the non-conduct of not buying health insurance—by establishing a federal police power that is authorized nowhere in the Constitution. Democrats will have legislated a new quasicrime, and perhaps the sole offense in our history that can be committed only by people of a certain income, since those below the poverty line would be exempt from the mandate. Congress’ attempt to punish a non-act that harms no one is an intolerable affront to the Constitution, liberty, and personal autonomy. That shameful fact cannot be altered by calling it health-care reform. This article appeared in the Philadelphia Inquirer on December 11, 2009.

Chapter 26

The Case against President Obama’s Health Care Reform: A Primer for Nonlawyers by Robert A. Levy Cato Institute White Paper (April 25, 2011)

Introduction The Supreme Court will soon get a crack at President Obama’s most important piece of domestic legislation. Three lower courts—in Virginia, Michigan, and Washington, D.C. 1 —have ruled that the Patient Protection and Affordable Care Act (PPACA) 2 is constitutional. Two other courts—in Florida and a second district in Virginia3 —disagreed. Appeals are pending. Oral argument in the Virginia cases is scheduled for May 10 before the U.S. Court of Appeals for the Fourth Circuit. The Michigan case will be heard on June 1 before the Sixth Circuit, and the Florida case will be heard on June 8 before the Eleventh Circuit. A momentous Supreme Court decision on the limits of congressional power is likely during the 2012–13 term, or earlier if the Court unexpectedly grants Virginia’s motion for expedited review, which would skip the intermediate appeals process. The central issue is whether there is constitutional authorization for Congress to have enacted PPACA —more specifically, the mandate in PPACA that individuals must acquire prescribed health insurance or pay a penalty for not doing so. Proponents of PPACA have cited the Taxing Power, the Commerce Clause, and the Necessary and Proper Clause as their constitutional pedigrees. Opponents dispute each of those arguments. For a better understanding of the constitutional complexities, here is a primer on the case against President Obama’s health care reform.

The Individual Mandate The health insurance mandate is the centerpiece of PPACA. It’s an unprecedented legal requirement that Americans purchase an approved policy, under penalty of law. Without the mandate, said President Obama to a joint session of Congress, the rest of the legislation falls apart. That’s because PPACA bars insurers from denying coverage for preexisting conditions—a step meant principally to address loss of coverage when a sick employee changes jobs. Predictably, there are unintended consequences. Consumers are not ignorant. If they know an insurer cannot deny coverage for preexisting conditions, rational consumers will wait until they are sick or injured before buying a policy. The waiting game means insurers won’t collect premiums from healthy people to cover the claims of unhealthy people. PPACA’s solution: Don’t let consumers wait until they’re sick; require everyone to buy insurance now, and

impose a penalty on anyone who declines. Prior to 2010, a federal mandate to purchase a product from a private company had never been tested in the courts. When one was last proposed in the context of Hillary-care in 1994, the Congressional Budget Office wrote: “A mandate requiring all individuals to purchase health insurance would be an unprecedented form of federal action. The government has never required people to buy any good or service as a condition of lawful residence in the United States.”4 Yet that is precisely what PPACA will do—unless and until the Supreme Court says otherwise.

The federal government’s first line of argument is that the mandate is authorized under Congress’s Taxing Power. Contrary to modern readings, that clause does not grant Congress an independent power to tax for the general welfare. If it did, there would be no need to enumerate any other powers. Rather, the clause authorizes Congress to raise revenue in support of the specifically enumerated powers that follow it. And the general welfare restriction precludes Congress from taxing to provide for special interests. All the same, the Supreme Court in Helvering v. Davis (1937) 5 established that taxes can be levied for just about any purpose that allegedly serves the general welfare. According to the Obama administration, that would include subsidizing insurers so they can afford to cover preexisting conditions. To their credit, none of the five federal courts that have ruled on PPACA has embraced the Taxing Power logic. Backdoor Regulation Challengers offered three responses to the administration’s Taxing-Power justification. First, Congress cannot use the Taxing Power as a backdoor means of regulating, unless the regulation is authorized elsewhere in the Constitution (see Bailey v. Drexel Furniture [1922])6. The purpose of a tax is to generate revenue. By contrast, the insurance mandate exists solely to coerce people into obtaining healthcare coverage. If the mandate worked perfectly, it would raise no revenue. But U.S. district judge Roger Vinson rejected that claim of “backdoor regulation.”7 Although he denied the federal government’s motion to dismiss a lawsuit by Florida—joined by 25 other states, the National Federation of Independent Businesses, and two individual plaintiffs—Vinson noted that courts no longer draw a sharp distinction between regulatory and revenue-raising purposes. In some sense, he declared, every tax has a regulatory component; the mandate is not unconstitutional merely because it regulates. A Penalty, Not a Tax The challengers fared considerably better in their second response to the government’s invocation of the Taxing Power. The assessment is not a tax, they asserted, but a penalty. Judge Vinson agreed. He pointed out that Congress had written “tax” in an earlier version of PPACA, but changed the word to “penalty” in the final version. Moreover, the word “tax” is used elsewhere in the bill to describe other sources of revenue; so the drafters of the legislation knew how to specify a tax when that’s what they meant. In addition, PPACA cited not the Taxing Power but the Commerce Clause as its constitutional

authority. The bill even barred the IRS from using its ordinary enforcement methods to collect the penalty, and the dollars supposedly to be collected were not counted in revenue estimates from the Congressional Budget Office. Apparently, Congress did not want the scrutiny that attaches to multibillion-dollar tax increases—especially after President Obama had repeatedly called the assessment a penalty and reminded voters of his promise not to impose any new taxes on the middle class. On the basis of that record, Judge Vinson was justifiably reluctant to override clear congressional intent. He concluded that “penalty” was not just a label, but was indicative of a nontax legislative purpose. In December, a month before the Vinson opinion, a second federal judge, Henry Hudson, reached the same conclusion, upholding Virginia’s challenge to PPACA. He characterized revenue generation as “a transparent afterthought” and “extraneous to any tax need.”8 Plainly, the mandate imposes a penalty, not a tax. Income, Excise, and Direct Taxes Assume, however, the Supreme Court ultimately disagrees and finds that the penalty for not purchasing health insurance is indeed a tax. Nevertheless, say opponents of PPACA, the tax would be unconstitutional. They underscore that taxes are of three types—income, excise, or direct. Each type must meet specified constitutional constraints. Because the mandate penalty under PPACA does not satisfy any of the constraints, it is not a valid tax. Income taxes, authorized by the Sixteenth Amendment, must (by definition) be triggered by income. Yet the mandate penalty is triggered by the nonpurchase of insurance. Except for an exemption available to low-income families, the amount of the penalty depends on age, family size, geographic location, and smoking status. So the penalty is not an income tax. Excise taxes are assessed on selected transactions. Because the penalty arises from a nontransaction, perhaps it qualifies as a reverse excise tax. If so, it has to be uniform across the country (U.S. Const., Art. I, sec. 8). But the penalty varies by location, so it cannot be a constitutional excise tax. Direct taxes are assessed on persons or their property. Because the penalty is imposed on nonownership of property, perhaps it could be classified as a reverse direct tax. But direct taxes must be apportioned among the states by population (U.S. Const., Art. I, sec. 2). The mandate penalty is assessed on individuals without regard to any state’s population. Hence, it is not a lawful direct tax. Of Credits and Debits Despite that, the administration notes that PPACA would have raised no eyebrows if the mandate had been structured as a tax credit for those who purchase health insurance rather than a debit for those who do not. After all, the Internal Revenue Code is replete with credits that incentivize various behaviors. Why not a credit for buying health insurance? Any person obtaining a policy would pay less tax than a person who did not—precisely the effect of PPACA’s penalty. The reality, however, is that Congress decided on a debit, not a credit. If Congress had enacted a credit, it would have lessened the impact of a preexisting, (presumably) legitimate tax —thus implicating the Constitution only to ensure that favored parties would not have to relinquish key rights as quid pro quo, and disfavored parties would not be subject to invidious or otherwise unreasonable discrimination. Furthermore, because tax credits reduce government revenue, some budget analysts characterize them as “tax expenditures.” If one subscribes to the notion that credits are equivalent to expenditures, then they would be authorized under Congress’s power to spend money. Conversely, instead of reducing revenue, tax debits raise money and must therefore be authorized

under the Taxing Power. As noted, the Taxing Power is subject to constraints not applicable to spending —that is, taxes must be income, excise, or direct; and each tax, depending on its type, must respectively be triggered by income, be geographically uniform, or be apportioned by population. The penalty for non-purchase of health insurance does not qualify as any of the three types of tax. Plainly put, the mandate cannot be justified under Congress’s “Power To lay and collect Taxes . . . [to] provide for the . . . general Welfare of the United States.” And that leads to the president’s second asserted source of constitutional authority: the power “To regulate Commerce . . . among the several States.”

The Commerce Power was not designed to provide Congress open-ended authority to regulate anything and everything that affects commerce. Instead, the Framers aimed at creating a national “freetrade zone,” putting an end to the interstate protectionism allowed under the Articles of Confederation. To ensure free trade among the states, Congress was given the power to regulate, or “make regular,” such commerce. If the clause had been understood to grant Congress the limitless regulatory power it now exercises, the Constitution would never have been ratified. Yet, in recent decades, the courts have allowed Congress to drift far from the original meaning of the Commerce Clause, regulating behaviors that are neither interstate nor commerce. That regrettable development was rooted in the New Deal. Wickard v. Filburn The infamous 1942 case of Wickard v. Filburn laid the groundwork for a vastly expanded regulatory state.9 Filburn grew wheat primarily for consumption by his family and farm animals. During the 1930s, to boost depressed prices of agricultural products, the Roosevelt administration decided to cut wheat production. Accordingly, the federal government ordered Filburn to grow fewer bushels. When Filburn asked officials for their constitutional authority, the government cited the power to regulate interstate commerce. Filburn responded that his farm was entirely within a single state and he neither bought nor sold crops across state lines. No matter, held the Supreme Court. By growing his own wheat, Filburn avoided buying. And, if he had not eaten what he grew, he would have been able to sell what was left over. Thus, by not buying and not selling, Filburn had an effect on the supply and demand for wheat—which, when considered in the aggregate, along with the crops of other farmers who did the same, undoubtedly impacted interstate commerce. That opened the floodgates through which the regulatory state was ready to pour—regulating anything and everything under the Commerce Clause. The Modern Framework Still, could the power to regulate commerce—properly defined as the exchange of goods—conceivably cover a non-economic event; that is, an event that does not involve growing, mining, manufacturing, buying, selling, distributing, or consuming? It took the Supreme Court more than a half-century to clarify the answer to that question. In United States v. Lopez (1995), the Court held that the Commerce Clause does not empower the federal government to criminalize possession of a gun near a school.10 Five years

later, in United States v. Morrison, the Court overturned a statute that invoked the Commerce Clause to grant victims of gender-motivated violence a right to sue in federal court.11 Those two cases, together with Wickard, yielded this modern framework for interpreting the Commerce Clause: Congress may regulate the exchange of products—that is, commerce—across state lines, and transportation linked to such exchanges. Congress can also regulate noncommercial, economic acts having a substantial aggregate effect on interstate commerce, such as growing and consuming wheat in Wickard. But Congress may not regulate non-economic acts, such as the mere possession of a gun in Lopez or a gender-based crime in Morrison. Constitutional originalists insist that the rules derived from Wickard and Lopez are far more expansive than the Framers intended. Today, instead of serving as a shield against state interference with free trade, the Commerce Power has become a sword wielded by the federal government in pursuit of a boundless array of regulations. Indeed, if the Framers intended the Commerce Clause to cover any economic act that had a substantial effect on interstate commerce, why did they separately enumerate powers for Congress to coin money, establish post offices, and issue patents? Surely, those powers would be redundant and add nothing to the text. Yet, as Chief Justice John Marshall admonished in Marbury v. Madison (1803), “It cannot be presumed that any clause in the constitution is intended to be without effect.”12 Compelled Activity Nonetheless, that’s where we now stand. The federal Commerce Power is indeed expansive. But the individual mandate in PPACA stretches still further—beyond dictating how, when, and under what conditions a product may be produced, distributed, exchanged, or consumed. The mandate actually compels that a transaction occur. Rather than merely regulating an economic act that affects interstate commerce, PPACA commands the purchase of a product—health insurance—that cannot legally be purchased across state lines. Under PPACA, neither an act nor an interstate market exists to be regulated. Essentially, the insurance mandate is regulatory bootstrapping of the worst sort. Congress forces someone to engage in commerce, then proclaims that the activity may be regulated under the Commerce Clause. If Congress can do that, it can prescribe all manner of human conduct. We know, however, that liberty and pervasive government cannot coexist. Even if Congress can regulate Filburn’s wheat production, that does not mean Congress can require consumers to purchase bread from their local grocer in order to subsidize wheat growers. At least for now, the Supreme Court’s tortured Commerce Clause jurisprudence does not reach that far. In Judge Hudson’s words: Courts have “never extended Commerce Clause powers to compel an individual to involuntarily enter the stream of commerce by purchasing a commodity in the private market.”13 The litmus test is economic activity. A mental decision not to buy insurance is not a physical economic act. In that respect, it is no different than a decision not to work. Neither decision can be regulated simply because the non-act, if converted into an act, might have an effect on interstate commerce. As Judge Hudson put it, “the subject matter must be economic in nature and affect interstate commerce, and . . . must involve activity.”14 (Emphasis added.) Thought processes are not subject to regulation. Other Mandates Defenders of PPACA respond that courts have upheld other federal mandates such as jury duty, the military draft, and obtaining guns

for militia service. Perhaps so; but those mandates are encompassed within specific constitutional provisions. The Sixth and Seventh Amendments guarantee jury trials, which imply a power to select jurors. Article I, section 8 expressly empowers Congress “To raise and support Armies” and “provide for . . . arming . . . the Militia.” When necessary, the Framers knew how to provide an express power, independent of the Commerce Clause. What about state mandates such as involuntary community service, compulsory schooling, and car insurance? First, states exercise police power and are not subject to constraints on federal authority in the U.S. Constitution. Second, community service does not require purchasing a good or service, and is not imposed by all schools—especially private and home schools. Third, compulsory schooling and mandatory car insurance are designed to protect the rights of innocent third parties—children, other drivers, and pedestrians. No car owner is compelled to buy casualty or comprehensive insurance that reimburses for injury to himself or his property. By contrast, PPACA directs individuals to acquire insurance on their own health. Fourth, cars are driven on public roads, so the government has some authority to dictate conditions for use of those roads. Fifth, nondrivers are not required to purchase car insurance. Driving is a voluntary activity, which has associated responsibilities. The insurance mandate is not voluntary and is imposed on everyone. Timing Decisions Finally, even if the mandate, considered in isolation, doesn’t regulate economic activity, PPACA supporters contend that requiring health insurance is no different than requiring advance purchase of health care. Nearly everyone ultimately consumes health care; and consumption is clearly an economic act. Why then, so the argument goes, wouldn’t the Commerce Clause allow the federal government to direct that health care be purchased now, by obtaining insurance, rather than later when the medical bill comes due? In other words, buying health insurance is just a timing decision about when, not whether, to incur medical costs. And if failure to purchase insurance were to trigger a penalty, it too would be mere timing—no different than assessing a penalty later, on someone who obtains future services from a hospital or doctor and does not pay the bill. Judge Vinson was not convinced. Nor should he have been. Virtually all forms of insurance represent timing decisions—paying up front for burial costs, loss of life, disability, supplemental income, credit default, business interruption, and more. Only a federal government of unbounded powers could mandate that every American insure against such risks. And while it might be permissible to penalize an uninsured person who shows up at a hospital or doctor’s office demanding that his expenses be borne by the taxpayers, that is not what PPACA does. Instead, PPACA penalizes all uninsured persons, not just those who seek to be reimbursed by government for costs they should have borne themselves. And PPACA does more than mandate coverage; it also prescribes certain provisions that each policy must include. Many Americans who prefer to insure using, for example, Health Savings Accounts with high deductible coverage, will be told by their federal overseers that such coverage isn’t adequate. Never has the Commerce Clause been stretched to such lengths. Never could the Framers have envisioned such overweening federal power. That’s why proponents of PPACA had to fashion a fallback position.

The Necessary and Proper Clause grants Congress the means to execute its enumerated powers or ends. It adds no new ends. And the chosen means must be both “necessary and proper”: They must respect the Constitution’s structure and spirit of limited government, the dual sovereignty of state and federal governments, and the rights retained by the people. The Obama administration attempts, unsuccessfully, to shoehorn the insurance mandate into that framework. Suppose the mandate to buy health insurance does not qualify as a direct regulation of interstate commerce. Even so, the administration argues, the Constitution authorizes implicit powers under the Necessary and Proper Clause. If government can show that (a) it has Commerce Clause authority to regulate interstate health care, (b) the insurance mandate is necessary for Congress to regulate interstate health care, and (c) the mandate is a proper means of doing so, then the courts are unlikely to intervene. Note that the government’s argument is still premised on its underlying Commerce Clause authority— but over health care, not health insurance. Forcing Americans to purchase an insurance product they do not want is ostensibly permissible, but only because the mandate is a necessary and proper means of regulating the national health care system. That assertion is the corollary of two underlying contentions, both of which are flawed. Cost Shifting and the Uninsured First, the mandate is said to be necessary because its elimination would perpetuate the problem of the uninsured—that is, taxpayers would continue to bear the burden of uncompensated emergency care. Without the mandate, responsible, insured consumers would have to pay the health costs of irresponsible, uninsured consumers. To put that in perspective, the Census Bureau reports that roughly 46 million Americans did not have health insurance at some point during 2007. But 10 million were noncitizens, mostly illegal; 14 million either did not report their Medicaid enrollment to the Census, or qualified but did not enroll; 10 million earned more than $75,000 annually and might have preferred to self-insure.15 Even allowing for overlap, there were far fewer than 46 million uninsured citizens with income below $75,000 who were not receiving or eligible to receive Medicaid. And many of the uninsured were temporarily without coverage because they were starting or switching jobs. Yes, there’s a residual problem, but it’s much less severe than trumpeted by backers of PPACA. Furthermore, as Judge Vinson observed, cost shifting by the uninsured is not inevitable. It arises only if a person gets sick, seeks medical care, cannot pay, and has no access to funds from family, friends, or private charities.16 That cost can be more efficiently addressed if and when it arises. Uncompensated care in the United States accounts for $56 billion yearly—about 2.2 percent of our annual $2.5 trillion in national health expenditures.17 That’s meaningful, but scarcely a crisis. Besides, many of the uninsured—those who are financially able and choose to self-insure—pay their bills without imposing costs on anyone. And because they self-insure, they typically pay higher prices for medical care—significantly more than is ordinarily reimbursed by public or private insurance. Those higher prices subsidize unhealthy insured individuals and offset the tax burden of uncompensated care. Moreover, an insurance mandate does not eliminate the cost of uncompensated care. It simply transfers the cost to insurance companies, which recoup their outlays by selling PPACA-mandated

policies to individuals who prefer not to own them. In fact, total healthcare costs will increase as more persons become insured. That’s the moral hazard predicament. Insured persons demand more medical services than persons who pay their own way. Higher demand means higher prices. It’s no accident that the costs of lasik and cosmetic surgery, which are not covered by insurance, have declined while the cost of MRIs, which is covered by insurance, has skyrocketed. PPACA’s insurance mandate will make matters worse. It is not only unnecessary; it is undesirable. Admittedly, nonpurchasers of health insurance sometimes impose costs on others; but so do nonpurchasers of many other products that could potentially reduce health costs—such as nutritional foods, exercise gear, and preventive medicine. Does the government also claim authority under the Necessary and Proper Clause to coerce purchase of those products? If so, why stop with health care? Defaults on credit cards and mortgages surely impose substantial costs on nondefaulters. Can government compel credit card and mortgage insurance? Preexisting Conditions The administration’s second rationale for invoking the Necessary and Proper Clause is no more convincing: Namely, it is essential that everyone be covered for preexisting conditions, and the insurance mandate is key to accomplishing that goal. Interestingly, PPACA allotted $5 billion for the Department of Health and Human Services to provide stopgap insurance to persons with preexisting conditions until the mandate is effective in 2014. Taxpayers subsidize 65 percent of the costs; coverage is extended to anyone turned down by a single insurance company; and premiums vary only by age, not health status. From the program’s inception in July 2010 through January 2011, combined federal and state enrollees numbered just over 12,000. Compare that to HHS estimates of 375,000 enrollees in the first four months and 400,000 more each year. That prompted the Wall Street Journal to editorialize that claims about a nation of sick indigents who are denied insurance may well be bogus. The country likely does not need a multitrillion-dollar entitlement to help 12,000 people.18 The Meaning of “Necessary” Ironically, HHS has defended both sides of this argument. On one hand, the mandate is presumably necessary for purposes of the Necessary and Proper Clause. On the other hand, in its legal briefs, HHS advised the courts that the mandate is “severable”—meaning that PPACA need not be overturned in its entirety even if the mandate is declared unconstitutional. Put somewhat differently, HHS maintains that the mandate can be stripped from the legislation without affecting the bulk of its other provisions. To explain that apparent contradiction, the administration relies on an 1819 Supreme Court opinion, McCulloch v. Maryland. 19 There, Chief Justice John Marshall rejected the commonplace meaning of “necessary”—that is, required, needed, essential—and broadened it to include all means that are “plainly adapted” to achieving a designated objective. Applying that expansive standard, Congress decided that compulsory health insurance is a reasonable measure to facilitate coverage of preexisting conditions. Thus, pronounces HHS, the mandate may not be indispensible, but it is “plainly adapted.” Once again, Judge Vinson saw through the sophistry: The mandate is artificially necessary—required only because Congress went down a particular path that left few if any alternatives. Vinson wrote: “[T]he individual mandate is actually being used as the means to avoid the adverse consequences of the

Act itself [i.e., compulsory coverage of preexisting conditions]. . . . [T]he more dysfunctional the results of the statute are, the more essential or ‘necessary’ the statutory fix would be. Under such a rationale, the more harm the statute does, the more power Congress could assume for itself under the Necessary and Proper Clause.”20 The Supreme Court is unlikely to endorse that rationale. But there is one other, more technical legal argument that the Court should also consider when it interprets “necessary” as it relates to the Commerce Clause. Prior cases established two bounds in deciding what means could be employed in regulating interstate commerce. First, if an activity is not commerce and not interstate, its regulation qualifies as “necessary” only if the activity has a “substantial effect” on interstate commerce. Second, if an activity is “non-economic,” its regulation falls outside the limits of “necessary.” PPACA’s challengers now ask the Court to establish a third restraint: The regulation of inactivity is never necessary in executing Congress’s Commerce Clause authority. That principle is easily administered by the courts, vital to constrain all-embracing federal power, and crucial to the Framers’ original design for limited government. The Meaning of “Proper” Lastly, consider the remaining term in the Necessary and Proper Clause: the requirement that a regulation be “proper.” Here too, Chief Justice Marshall set the standard in McCulloch. A regulation is “proper” if it does not violate established rights and is consistent “with the letter and spirit of the constitution.”21 Only a handful of scholarly articles have addressed the legal meaning of “proper”; but Judge Vinson had no trouble applying Marshall’s guidepost: “The individual mandate . . . cannot be reconciled with a limited government of enumerated powers. By definition, it cannot be ‘proper.’”22 Joseph Story, the renowned constitutional expert, expressed the same sentiment in his 1833 Commentaries: “The constitution of the United States is to receive a reasonable interpretation of its language, and its powers, keeping in view the objects and purposes, for which those powers were conferred. . . . [I]n case the words are susceptible of two different senses, the one strict, the other more enlarged, that should be adopted, which is most consonant with the apparent objects and intent of the Constitution.”23 Extending that test to PPACA, no one could plausibly argue that the Commerce Power is so elastic as to compel the purchase by every American of an unwanted, government-designed product from a private company. For a slightly different perspective on the meaning of “proper,” recall the Tenth Amendment, which provides that all powers not enumerated and delegated to the national government “are reserved to the States . . . or to the people.” That provision protects both state sovereignty and personal sovereignty against federal encroachment. One aspect of such protection is to bar the federal government from commandeering state legislatures (see New York v. United States [1992]) 24 and state enforcement authorities (see Printz v. United States [1997]) 25 to carry out federal programs. Because the Tenth Amendment is neutral as between reserving powers to the states or to the people, it follows that neither individuals nor states may be commandeered. Accordingly, a mandate that coerces individual acts is no more “proper” than a mandate that coerces state acts.

What Should Congress Have Done?

What then should Congress have done about uninsured consumers and coverage of preexisting conditions, without running afoul of the Commerce Clause and the Necessary and Proper Clause? A number of options were suggested to Congress, but rejected. First, expedite competition by allowing interstate sales of health insurance. Second, encourage the states to reform their medical malpractice laws. Third, eliminate restrictions on Health Savings Accounts with high-deductible coverage. Fourth, and most important, change the income tax treatment of health insurance premiums that discriminates against individual polices in favor of corporate policies. Medical insurance premiums are mainly paid by employers, not patients. Because patients do not bargain directly with providers of corporate health insurance, guaranteed renewable coverage, which would largely alleviate the problem of preexisting conditions, is not available in the corporate market. By comparison, individual consumers of term life insurance have no problem obtaining guaranteed renewable policies. Our tax code is the culprit. Employees do not have to include the cost of employer-provided medical insurance as part of their taxable income, and businesses can deduct that cost as an ordinary expense. No equivalent deduction is available to individuals who buy their own health insurance. So it’s more economical for each person to obtain standardized coverage through his employer, rather than tailored coverage from an insurer. In that manner, federal tax policy drives another wedge between the patient and his care provider. Not only is there an insurance company that pays the doctor or hospital, but also an employer that pays the insurance company. The net result is that patients seldom monitor the cost of their medical care or their insurance. One solution: Allow patients to deduct the cost of medical insurance against their personal income taxes. That would eliminate the incentive for employers to pay for health insurance and remove the employer from the doctor-patient relationship. It would encourage consumers to do what they do in other markets—shop around for adequate and fairly priced service. Those market-based solutions, grounded on individual responsibility, would raise no constitutional concerns. In contrast, PPACA is grounded on subsidies, dependency, and compulsion. Most significant, PPACA’s key provision—the individual insurance mandate—is unconstitutional. It is not a tax; it is not interstate commerce; and it is neither necessary nor proper to fix our ailing healthcare system. “At its core,” wrote Judge Hudson in the Virginia case, “this dispute is . . . about an individual’s right to choose to participate.”26 In Florida, Judge Vinson put it this way: “If Congress can penalize a passive individual for failing to engage in commerce, the enumeration of powers in the Constitution would have been in vain.”27 That sums it up.

Suppose that the federal government, in its infinite wisdom, decided that it would deal with the obesity crisis and improve the health and welfare of the American people—by mandating that every American eat three helpings of vegetables and three helpings of fruit every day. Anyone caught failing to eat the required food would be subject to a fine or tax. Would such a law be constitutional? Sen. Tom Coburn (R-Okla.) put that question to Supreme Court nominee Elena Kagan this week. Kagan, the U.S. solicitor general, couldn’t answer. In fact, she implied that under the court’s “expansive” view of the Constitution’s Commerce Clause, a fruit and vegetable mandate might be just fine. Now, some may think that such a hypothetical question is silly, other than giving us a glimpse of Kagan’s virtually unlimited view of government power. Congress would never pass such a “dumb” law, to use Kagan’s term—would it? But Congress has just taken a very similar step, mandating that every American purchase a government-designed package of health-insurance benefits. The issue is now before the courts— there’s a hearing today. And supporters of the mandate justify it under exactly the broad interpretation of the Commerce Clause that Kagan cited. In fact, the health-care bill itself says that the mandate is constitutional because “the individual responsibility requirement . . . is commercial and economic in nature, and substantially affects interstate commerce.” The Founders must be spinning in their graves. The Commerce Clause grants Congress the power to “regulate Commerce . . . among the several States.” It was intended to prevent states from erecting trade barriers among themselves, as was common practice under the Articles of Confederation (our governing national document before ratification of the Constitution), and to allow the federal government to deal with such issues as river navigation. However, in the 1942 case of Wickard v. Filburn , the high court interpreted the clause so as to give Congress the authority to reach wholly intrastate-economic activity that “substantially affects” interstate commerce. In that case, the federal government, in order to help farmers by keeping wheat prices high, had imposed limits on how much wheat farmers could grow. One farmer, Roscoe Filburn, was growing wheat not for sale but to feed to his own chickens. He argued that since he wasn’t selling wheat—let alone selling it across state lines—he wasn’t subject to the restrictions. The court, setting the foundation for the modern regulatory state, held that because Filburn’s farming reduced the amount of wheat he would buy for chicken feed from others, and because wheat was traded nationally, growing his own wheat was affecting interstate commerce, and therefore could be regulated. But the individual mandate contained in the health-care reform bill goes beyond regulating even

intrastate activity to regulate nonactivity. That is: Everything you do or don’t do could be seen as affecting interstate commerce—so, in this interpretation, everything you do or don’t do could be regulated by Congress. Thus, Congress would be free to order you to take or not take a job, to sell or not sell your house, to buy or not buy a car—or to eat more fruits and vegetables. This individual-insurance mandate is unprecedented in U.S. governance. As the Congressional Budget Office noted, “a mandate requiring all individuals to purchase health insurance would be an unprecedented federal action. The government has never required people to buy any good or service as a condition of lawful residence in the United States.” However, as Sen. Coburn’s question and Kagan’s response make clear, if the courts uphold the mandate’s constitutionality, the last limits on federal-government power will be gone. It was easy to see the debate over health-care reform as being about the best way to deliver and pay for health care. But it was always about much more than that. If nothing else, we owe a debt of gratitude to Solicitor General Kagan for making absolutely clear what is really at stake: freedom. This article appeared in the New York Post on July 1, 2010.

Chapter 28

Obamacare Is Unconstitutional by Roger Vinson

On March 23, 2010, President Obama signed The Patient Protection and Affordable Care Act. This case was filed minutes after the President signed it. This case is not about whether the Act is wise or unwise legislation, or whether it will solve or exacerbate the myriad problems in our health care system. In fact, it is not really about our health care system at all. It is principally about our federalist system, and it raises very important issues regarding the Constitutional role of the federal government. James Madison, the chief architect of our federalist system, observed in Federalist No. 51: In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. The Founders endeavored to resolve Madison’s identified “great difficulty” by creating a system of dual sovereignty. The Tenth Amendment reaffirmed that relationship: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The Framers believed that limiting federal power, and allowing the “residual” power to remain in the hands of the states (and of the people), would help “ensure protection of our fundamental liberties” and “reduce the risk of tyranny and abuse.” The great Chief Justice John Marshall noted “that those limits may not be mistaken, or forgotten, the Constitution is written.” THE SCOPE OF THE COMMERCE CLAUSE To say that the federal government has limited and enumerated power does not get one far, however, for that statement is a long-recognized and well-settled truism. The ongoing challenge is deciding whether a particular federal law falls within or outside those powers. For this claim, the plaintiffs contend that the individual mandate exceeds Congress’ power under the Commerce Clause. At issue here is the assertion that the Commerce Clause can only reach individuals and entities engaged in an “activity”; and because the plaintiffs maintain that an individual’s failure to purchase health insurance is, almost by definition, “inactivity,” the individual mandate goes beyond the Commerce Clause and is unconstitutional. The defendants contend that activity is not required before Congress can exercise its Commerce Clause power, but that, even if it is required, not having insurance constitutes activity. The Commerce Clause is a mere sixteen words long, and it provides that Congress shall have the power:

to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes. For purposes of this case, only seven words are relevant: “To regulate Commerce . . . among the several States.” There is considerable historical evidence that in the early years of the Union, the word “commerce” was understood to encompass trade, and the intercourse, traffic, or exchange of goods. In a frequently cited law review article, constitutional scholar Randy E. Barnett has painstakingly tallied each appearance of the word “commerce” in Madison’s notes on the Constitutional Convention and in The Federalist, and discovered that in none of the 97 appearances of that term is it ever used to refer unambiguously to activity beyond trade or exchange. The Supreme Court’s first description of commerce (and still the most widely accepted) is from Gibbons v. Ogden. Chief Justice Marshall explained that “Commerce, undoubtedly, is traffic, but it is something more: it is intercourse. It describes the commercial intercourse between nations, and parts of nations, in all its branches, and is regulated by prescribing rules for carrying on that intercourse.” To acknowledge the foregoing historical facts is not necessarily to say that the power under the Commerce Clause was intended to (and must) remain limited to the trade or exchange of goods, and be confined to the task of eliminating trade barriers erected by and between the states. The drafters of the Constitution were aware that they were preparing an instrument for the ages, not one suited only for the exigencies of that particular time. NOVEL AND UNPRECEDENTED The plaintiffs rely heavily on Lopez and Morrison in framing their arguments, while the defendants look principally to Wickard and Raich. These cases all have something to add to the discussion. However, while they frame the analysis, and are important from a historical perspective, they do not by themselves resolve this case. That is because, as Congress’s attorneys in the Congressional Research Service and Congressional Budget Office advised long before the Act was passed into law, the notion of Congress having the power under the Commerce Clause to directly impose an individual mandate to purchase health care insurance is “novel” and “unprecedented.” Never before has Congress required that everyone buy a product from a private company (essentially for life) just for being alive and residing in the United States. However, unprecedented or not, I will assume that the individual mandate can be Constitutional under the Commerce Clause and will analyze it accordingly. IS INACTIVITY ACTIVITY? The threshold question that must be addressed is whether activity is required before Congress can exercise its power under the Commerce Clause. Commerce Clause jurisprudence has contracted and expanded (and contracted and expanded again) during our nation’s development. But, in every one of those instances—in both the contractive and expansive—there has always been clear and inarguable activity, from exerting control over and using navigable waters (Gibbons) to growing or consuming marijuana (Raich). The Supreme Court has never been called upon to consider if “activity” is required. The defendants contend, however, that despite the inarguable presence of activity in every Supreme Court case to date, activity is not required under the Commerce Clause. In fact, they go so far as to suggest that to impose such a requirement would be bold and radical. According to the defendants,

because the Supreme Court has never identified a distinction between activity and inactivity as a limitation on Congress’s commerce power, to hold otherwise would “break new legal ground” and be “novel” and “unprecedented.” First, it is interesting that the defendants—apparently believing the best defense is a good offense—would use the words “novel” and “unprecedented,” since those are the exact same words that the CRS and CBO used to describe the individual mandate before it became law. Furthermore, there is a simple and rather obvious reason why the Supreme Court has never distinguished between activity and inactivity before: it has not been called upon to consider the issue because, until now, Congress had never attempted to exercise its Commerce Clause power in such a way before. In every Supreme Court case decided thus far, Congress was not seeking to regulate, under its commerce power, something that could even arguably be said to be “passive inactivity.” It would be a radical departure from existing case law to hold that Congress can regulate inactivity under the Commerce Clause. If it has the power to compel an otherwise passive individual into a commercial transaction with a third party merely by asserting—as was done in the Act—that compelling the actual transaction is itself “commercial and economic in nature, and substantially affects interstate commerce,” it is not hyperbolizing to suggest that Congress could do almost anything it wanted. It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place. If Congress can penalize a passive individual for failing to engage in commerce, the enumeration of powers in the Constitution would have been in vain, for it would be “difficult to perceive any limitation on federal power” (Lopez), and we would have a Constitution in name only. Surely this is not what the Founding Fathers could have intended. Having found that “activity” is an indispensable part [of] the Commerce Clause analysis, the constitutionality of the individual mandate will turn on whether the failure to buy health insurance is “activity.” Preliminarily, based solely on a plain reading of the Act itself (and a commonsense interpretation of the word “activity” and its absence), I must agree with the plaintiffs’ contention that the individual mandate regulates inactivity. Section 1501 states in relevant part: “If an applicable individual fails to [buy health insurance], there is hereby imposed a penalty.” By its very own terms, therefore, the statute applies to a person who does not buy the government-approved insurance; that is, a person who “fails” to act pursuant to the congressional dictate. The defendants insist that the uninsured are active. In fact, they even go so far as to make the claim— which the plaintiffs call “absurd”—that going without health insurance constitutes “economic activity to an even greater extent than the plaintiffs in Wickard or Raich.” The defendants contend that there are three unique elements of the health care market which, when viewed cumulatively and in combination, belie the claim that the uninsured are inactive. First, as living and breathing human beings who are always susceptible to sudden and unpredictable illness and injury, no one can “opt out” of the health care market. Second, if and when health services are sought, hospitals are required by law to provide care, regardless of inability to pay. And third, if the costs incurred cannot be paid (which they frequently cannot, given the high cost of medical care), they are passed along (costshifted) to third parties, which has economic implications for everyone. Congress found that the uninsured received approximately $43 billion in “uncompensated care” in 2008 alone. These three things, according to the defendants and various health care industry experts and scholars on whom they rely, are “replicated in no other market” and defeat the argument that uninsured individuals are inactive.

First, it is not at all clear whether or why the three allegedly unique factors of the health care market are constitutionally significant. What if only one of the three factors identified by the defendants is present? After all, there are lots of markets—especially if defined broadly enough—that people cannot “opt out” of. For example, everyone must participate in the food market. Instead of attempting to control wheat supply by regulating the acreage and amount of wheat a farmer could grow as in Wickard, under this logic Congress could more directly raise too-low wheat prices merely by increasing demand through mandating that every adult purchase and consume wheat bread daily, rationalized on the grounds that because everyone must participate in the market for food, non-consumers of wheat bread adversely affect prices in the wheat market. Or, as was discussed during oral argument, Congress could require that people buy and consume broccoli at regular intervals, not only because the required purchases will positively impact interstate commerce, but also because people who eat healthier tend to be healthier, and are thus more productive and put less of a strain on the health care system. Similarly, because virtually no one can be divorced from the transportation market, Congress could require that everyone above a certain income threshold buy a General Motors automobile—now partially government owned—because those who do not buy GM cars (or those who buy foreign cars) are adversely impacting commerce and a taxpayer- subsidized business. That the defendants’ argument is “unsupported by Commerce Clause jurisprudence” can perhaps best be seen by looking to Lopez. Although that case is distinct from this one in some notable ways, in the context of the defendants’ “health care is unique” argument, it is quite similar. THE LOPEZ CASE I n Lopez, the majority was concerned that using the Commerce Clause to regulate things such as possession of guns in school zones would “obliterate” the distinction between what is national and what is local and effectively create a centralized government that could potentially permit Congress to begin regulating “any and all aspects” of our lives, including marriage, divorce, child custody, and education. The dissent insisted that this concern was unfounded because the statute at issue was “aimed at curbing a particularly acute threat” of violence in schools that had “singularly disruptive potential.” This was “the rare case, then, that a statute strikes at conduct that (when considered in the abstract) seems so removed from commerce, but which (practically speaking) has so significant an impact upon commerce.” Two things become apparent after reading these arguments attempting to justify extending Commerce Clause power to the legislation in that case, and the majority opinion (which is the controlling precedent) rejecting those same arguments. First, the contention that Commerce Clause power should be upheld merely because the government and its experts or scholars claim that it is being exercised to address a “particularly acute” problem that is “singular [ ],” “special,” and “rare”— that is to say “unique”—will not by itself win the day. Uniqueness is not an adequate limiting principle, as every market problem is, at some level and in some respects, unique. If Congress asserts power that exceeds its enumerated powers, then it is unconstitutional, regardless of the purported uniqueness of the context in which it is being asserted. Second, and perhaps more significantly, under Lopez the causal link between what is being regulated and its effect on interstate commerce cannot be attenuated and require a court “to pile inference upon inference,” which is, in my view, exactly what would be required to uphold the individual mandate. For example, in contrast to individuals who grow and consume marijuana or wheat (even in extremely small

amounts), the mere status of being without health insurance, in and of itself, has absolutely no impact whatsoever on interstate commerce—not “slight,” “trivial,” or “indirect,” but no impact whatsoever—at least not any more so than the status of being without any particular good or service. If impact on interstate commerce were to be expressed and calculated mathematically, the status of being uninsured would necessarily be represented by zero. Of course, any other figure multiplied by zero is also zero. Consequently, the impact must be zero, and of no effect on interstate commerce. The uninsured can only be said to have a substantial effect on interstate commerce in the manner as described by the defendants: (i) if they get sick or injured; (ii) if they are still uninsured at that specific point in time; (iii) if they seek medical care for that sickness or injury; (iv) if they are unable to pay for the medical care received; and (v) if they are unable or unwilling to make payment arrangements directly with the health care provider, or with assistance of family, friends, and charitable groups, and the costs are thereafter shifted to others. In my view, this is the sort of piling “inference upon inference” rejected in Lopez and subsequently described in Morrison as “unworkable if we are to maintain the Constitution’s enumeration of powers.” While $43 billion in uncompensated care from 2008 was only 2% of national health care expenditures for that year, it is clearly a large amount of money, and it demonstrates that a number of the uninsured are taking the five sequential steps. And when they do, Congress plainly has the power to regulate them at that time (or even at the time that they initially seek medical care), a fact with which the plaintiffs agree. But, to cast the net wide enough to reach everyone in the present, with the expectation that they will (or could) take those steps in the future, goes beyond the existing “outer limits” of the Commerce Clause and would, I believe, require inferential leaps of the sort rejected in Lopez. The defendants’ argument that people without health insurance are actively engaged in interstate commerce based on the purported “unique” features of the much broader health care market is neither factually convincing nor legally supportable. The defendants next contend that the uninsured have made the calculated decision to engage in market timing and try to finance their future medical needs out-of-pocket rather than through insurance, and that this “economic decision” is tantamount to activity. The problem with this legal rationale, however, is it would essentially have unlimited application. There is quite literally no decision that, in the natural course of events, does not have an economic impact of some sort. It is not difficult to identify an economic decision that has a cumulatively substantial effect on interstate commerce; rather, the difficult task is to find a decision that does not. CONCLUSION Because I find both the “uniqueness” and “economic decision” arguments unpersuasive, I conclude that the individual mandate seeks to regulate economic inactivity, which is the very opposite of economic activity. And because activity is required under the Commerce Clause, the individual mandate exceeds Congress’ commerce power, as it is understood, defined, and applied in the existing Supreme Court case law. Congress must operate within the bounds established by the Constitution. For the reasons stated, I must reluctantly conclude that Congress exceeded the bounds of its authority in passing the Act with the individual mandate. Because the individual mandate is unconstitutional and not severable, the entire Act must be declared void. This has been a difficult decision to reach, and I am aware that it will have indeterminable implications. At a time when there is virtually unanimous agreement that health care

reform is needed in this country, it is hard to invalidate and strike down a statute titled “The Patient Protection and Affordable Care Act.” My conclusion in this case is based on an application of the Commerce Clause law as it exists pursuant to the Supreme Court’s current interpretation and definition. Only the Supreme Court (or a Constitutional amendment) can expand that. The Patient Protection and Affordable Care Act is unconstitutional. This article appears in Cato Policy Report, March/April 2011.

With the scheduled three days of oral argument six weeks away, Cato filed its fourth and final Supreme Court amicus brief in the Obamacare saga, this time on the most critical issue: the constitutionality of the individual mandate. Cato, alongside Pacific Legal Foundation, Competitive Enterprise Institute, 14 other organizations, and a bipartisan group of 333 state legislators, urges the Court to affirm the Eleventh Circuit’s ruling that the mandate exceeds Congress’s power to regulate interstate commerce. Under modern doctrine, regulating intrastate economic activity can be a “necessary” means of carrying out Congress’s regulatory authority (as that term is understood under the Necessary and Proper Clause) if, in the aggregate, it has a substantial effect on interstate commerce. But the obvious corollary is that regulating non-economic activity cannot be “necessary,” regardless of its economic effects. And a power to regulate inactivity—to compel activity—is even more remote from Congress’s commerce power. The government characterizes not being insured as the activity of making an “economic decision” of how to finance health care services, but the notion that probable future participation in the marketplace constitutes economic activity now pushes far beyond existing precedent. Further, that definition of “activity” leaves people with no way of avoiding federal regulation; at any moment, we are all not engaged in an infinite set of activities. Retaining the categorical distinction between economic and non-economic activity limits Congress to regulating intrastate activities closely connected to interstate commerce—thus preserving the proper role of states and preventing Congress from using the Commerce Clause as a federal police power. The categorical distinction also provides a judicially administrable standard that obviates fact-based inquiries into the purported economic effects and the relative necessity of any one regulation, an exercise for which courts are ill-suited. Finally, the mandate violates the “proper” prong of the Necessary and Proper Clause in that it unconstitutionally commandeers the people—and in doing so, circumvents the Constitution’s preference for political accountability. The Constitution permits Congress to intrude on state and popular sovereignty only in certain limited circumstances: when doing so is textually based or when it relates to the duties of citizenship. For example, Congress may require people to respond to the census or serve on juries. In forcing people to engage in transactions with private companies, the individual mandate allows Congress and the president to evade being held accountable for what would otherwise be a tax increase. In improperly commandeering citizens to engage in economic activity, the mandate obscures Obamacare’s true costs and thus avoids the political accountability and transparent budgeting that the Constitution demands. Thus, the mandate is neither a necessary nor proper means for carrying into execution Congress’s power to

regulate interstate commerce. Upholding it would fundamentally alter the relationship of the federal government to the states and the people; nobody would ever again be able to claim plausibly that the Constitution limits federal power. Download the complete brief.

Chapter 30

Baking Some Humble Pie for Congress by Trevor Burrus

The challenge to the Affordable Care Act, a.k.a. Obamacare, has come a long way since then-Speaker of the House Nancy Pelosi incredulously asked “are you serious?” in response to a reporter’s question on its constitutionality. As oral arguments before the Supreme Court near, the Court should show Pelosi just how “serious” a transgression this law is. Not only is the individual mandate, which requires nearly every American purchase a qualifying health insurance plan, a forced wealth transfer that is not authorized by any of Congress’s limited powers, it is a forced transfer that was deliberately and deceptively passed in order to avoid the political liability of imposing a tax. For both reasons it is unconstitutional. For the second reason we should be angry. By forcing relatively healthy people to purchase insurance, Congress hoped to subsidize the health care costs of less healthy people. Under current constitutional law, the same result could have been accomplished by increasing taxes and directly subsidizing insurance companies. Instead, Congress chose to command everyone to give their money to a private business. The ultimate effect is essentially the same: an expensive, dysfunctional, and ineffective health care system mostly controlled by the federal government. By choosing to use the individual mandate Congress has not only harmed our health care system, it has seriously imperiled our Constitution. Imagine a world in which Congress is allowed to avoid the political accountability of huge tax increases and budgetary explosions by commanding people to purchase a product. Members of Congress would be able to claim accurately, if not totally honestly, that they did not raise taxes or increase the budget during their term. The Framers of the Constitution understood politicians’ self-interested motives and thus added safeguards that limit the powers of Congress and ensure the accountability of our representatives to the people. By ignoring these safeguards, the Act violates “the letter and spirit of the constitution,” in the words of Chief Justice John Marshall. The Framers were aware that the power to tax was among the most dangerous powers of government. During the Constitutional Convention they devoted considerable time to debating the Origination Clause, a relatively unknown clause requiring that all “Bills for raising Revenue shall originate in the House of Representatives.” Many delegates saw the clause as so essential to good government that they were willing to quit the convention if it were not included. In the words of George Mason, to not include the clause would “unhinge the compromise” that had created popular representation in the House and equal representation in the Senate. The clause was crucial because, in the words of Ben Franklin, “It was always of importance that the people should know who had disposed of their money, and how it had been disposed of.” Only the House, being closest to the people in terms of number of constituents and length of term, could be trusted with taking money from the people in a responsible fashion.

Additionally, in order to provide the people information on how much money is being taken and spent, the Framers also included the Statement and Account Clause, which requires a “regular Statement and Account of Receipts and Expenditures of all public Money shall be published from time to time.” Though both the Origination Clause and the Statement and Account Clause are largely unenforceable through the courts, they form part of the “spirit of the constitution,” and that spirit is clear: forced wealth transfers must be above-the-board and transparent. The individual mandate is not only off-thebooks, it is a duplicitous attempt on the part of Congress to avoid the political liability for the costs of an entitlement program but to still receive the political gains from the beneficiaries. President Clinton’s health care proposal mostly failed because of an astronomical budgetary estimate that included the personal costs of an individual mandate. After that episode, Congress learned to be sneaky when it comes to budget estimates. By using special accounting tricks in Obamacare, the costs to individuals forced to purchase insurance are not included in the budgetary estimate of the law. In other words, the individual mandate allows Congress to achieve the ultimate politicians’ coup: clandestinely taking money and doling out benefits. If this law stands, they will do it again. How could they resist? The challenge to the Affordable Care Act not only asks the Supreme Court to enforce the limits on congressional power explicitly listed in our Constitution, it asks for the return of some measure of humility to a Congress that self-interestedly ignored constitutional limits. The Court should unambiguously chide Congress and restore some dignity to the men who sat through a hot Philadelphia summer to ensure an honest and accountable government. This article appeared in Huffington Post on March 27, 2012.

Chapter 31 The Supreme Obamacare Question by Michael D. Tanner

Next week, the Supreme Court will devote six hours over three days to hearing challenges to the Patient Protection and Affordable Care Act, a k a ObamaCare. The last time the court spent this much time hearing arguments in a case was in 1966, when it devoted six hours to the case establishing a defendant’s Miranda rights and seven hours to the case that upheld the Voting Rights Act. This decision is likely to be just as momentous. That’s because this case isn’t really about health-care reform. Rather, it’s about government power and the fundamental relationship between government and the people. The court will hear four separate but related arguments, but all the issues boil down to a simple but important question: Do we have a government of limited, enumerated powers or a government of unbridled power, with the authority to control and direct every aspect of our lives? In defending the health-care law, the Obama administration relies on two constitutional provisions to justify its claim of federal power. The first is the Commerce Clause, which grants Congress the power to “to regulate commerce . . . among the several states.” This is supposed to justify ObamaCare’s mandating that each of us buy insurance (the “individual mandate”). How does a decision not to buy something constitute commerce? Well, since the New Deal era, the courts have expanded the definition of commerce to include any “activity” that has a “substantial economic effect on interstate commerce.” Thus the high court has held that such things as growing wheat to feed to your cattle (Wickard v. Philburn ) or distributing medical marijuana (Gonzalez v. Raich) can be regulated as interstate commerce. But both growing wheat and giving away pot involve doing something. The Obama administration is seeking to extend Congress’s power to inactivity. Congress would not only have the power to regulate how you do something or to prohibit you from doing it, Congress now could require you to do something. In a bit of Orwellian logic, the administration argues that by not doing something, you actually are doing something. As a lower-court judge wrote in upholding the mandate, choosing not to do something is “mental activity,” and is therefore subject to regulation. Thus, government essentially is asserting its authority over every thought in your head. The crucial concern here is what lawyers call a “limiting principle.” If the court upholds the government’s power to force you to buy health insurance, is there any limit to this power? Is there anything the government can’t require you to do? So far, the administration hasn’t found anything that lies outside their reach. Deputy Assistant Attorney General Beth Brinkmann, arguing this case before a lower court, was asked whether a federal law requiring Americans to eat broccoli would be constitutional.

“It depends,” she replied, but said she could envision cases in which it would be. Likewise, she thought that a law requiring people to buy cars from General Motors to keep it in business might well be constitutional. If the court buys into the administration’s reasoning, we probably still wouldn’t have to worry about the broccoli police anytime soon—but there would be little constitutional protection from Washington’s regulation of anything you do . . . or don’t do. The administration also cites the Constitution’s Necessary and Proper Clause, which grants Congress authority “To make all Laws which shall be necessary and proper for carrying into Execution [its constitutional powers].” The argument here is that health care is an important problem facing this country, and the administration’s preferred remedy for that problem can’t be carried out without the individual mandate. The mandate, therefore, is a “necessary and proper” way to accomplish its larger goals. Again, this would open the door to unlimited government power. If the government has the authority to enact any law it deems necessary to doing whatever it wants to do, the Constitution essentially becomes meaningless. As the 11th Circuit Court wrote when it ruled that the mandate was unconstitutional, “We have not found any generally applicable, judicially enforceable limiting principle that would permit us to uphold the mandate without obliterating the boundaries inherent in the system of enumerated congressional powers.” That, and not a costly boondoggle of a health-care plan, is what’s really at stake next week. This article appeared in the New York Post on March 22, 2012.

Harvard law professor Noah Feldman opines that U.S. Solicitor General Don Verrilli “faltered” yesterday when Supreme Court justices asked whether the Obama administration’s claim that the Constitution empowers Congress to force people to purchase health insurance contains any limiting principle. Put differently, if the power “To regulate commerce . . . among the several States” allows the government to force you to buy health insurance, can the government also force you to buy broccoli? Feldman laments that Verrilli’s “failure to offer a sharp distinction could be disastrous for the government’s case,” but assures us, “There is a good, sharp answer to this wholly reasonable question.” Here is the preface to Feldman’s answer: [W]hen it comes to the strange and unusual case of health insurance, inaction causes the whole market to break down. By not buying health insurance, the healthiest person is depriving everyone of a public good. By sitting on their hands—and acting rationally— people who do not purchase insurance are unintentionally causing the market to fail. One problem here is that if Congress can compel you to buy something whenever not buying it would deprive someone else of a public good, then Congress can also force you to purchase—not just tax and provide to you, but force you to purchase—tanks, fighter jets, and military bases; lighthouses; software; fireworks displays; e-books; comparative-effectiveness research (or really any type of research); a subscription to Consumer Reports; landscaping services; parks; rare and endangered species; street lights; et cetera ad nauseam. That isn’t much of a limiting principle. Another problem is that economists use the term “market failure” to describe a situation where one or more features of a free market cause that market to fall short of the efficiency-maximizing outcome. Feldman misuses it to mean, “This market isn’t doing what I want.” That is not market failure. Nor is it much of a limiting principle. If the Commerce Clause empowered Congress to force people to buy things to correct every perceived shortcoming in every market, Congress’ powers would be without limit. Even worse, Feldman doesn’t even bother identify whether the outcome he deplores is caused by some feature of a free market or government intervention (see below). But that was just preface to Feldman’s supposed limiting principle. Here’s the meat of it: The government can penalize inaction only when that inaction deprives everyone else of a public good . . . There must be an asymmetry of information about the relevant facts governing insurance— like the difference between my knowledge of how healthy I am and the insurance company’s ability to suss it out. And the market must be one in which that information asymmetry leads to adverse selection.

Though Feldman begins by stating government can force you to purchase any public good— another economic concept he seems to misunderstand—by the end of the paragraph he narrows his limiting principle to situations where asymmetric information causes market failures in insurance. Sorry, but that’s still not much of a limiting principle. For one thing, it would enable Congress to force Americans to purchase basically any type of insurance. Asymmetries of information, in the absence of regulation, lead to adverse selection in all insurance markets. Insurers typically remedy this problem by adjusting premiums to reflect the risk posed by the purchaser, but there will always be situations where some purchasers know they pose a greater risk of filing claims than carriers realize. Fortunately, the risk-aversion of other purchasers acts as a counterweight and prevents those markets from collapsing. But since all adverse selection causes at least some mutually beneficial insurance purchases not to occur—the sort of welfare loss that constitutes an actual market failure—Feldman’s so-called limiting principle would allow Congress to force you to buy any type of insurance it wants, so long as Congress finds even a sliver of adverse selection. That opens to door for Congress to mandate that everyone purchase life, auto, disability, flood, mortgage, renter’s, terrorism, earthquake, deposit, pet, earthquake, divorce, and long-term care insurance. Congress could even require you to purchase reinsurance—i.e., insurance against the that risk that your other insurance policies won’t pay. No doubt adverse selection prevents some unfortunate professional athletes and performers from insuring against the failure of their hair, legs, hands, teeth, vocal chords, fingers, ankles, tongues, and entire bodies. Ditto the threat of a paternity suit. If so, then Feldman’s “limiting principle” would let Congress mandate that everyone purchase those insurance policies, too. Feldman’s limiting principle would even allow Congress to force Americans to purchase types of insurance that currently don’t exist. What if adverse selection so bedevils the markets for BAC-level insurance, positive-drug-test insurance, short-term-suicide insurance, overgrown-grass insurance, and oversleeping insurance that no carriers even offer such policies? Under Feldman’s rule, Congress could fix that by forcing carriers to offer such insurance and forcing you to buy it. And that’s only what Congress could do in the presence of whatever scant adverse selection exists in unregulated insurance markets. But regulation typically encourages adverse selection–a point that Feldman elides, as if the catastrophic adverse selection that ObamaCare’s “community rating” price controls will cause were the market’s fault rather than Congress’. So what Feldman is actually saying is that Congress can force you to purchase insurance even if Congress itself caused the adverse selection. Which brings us back to broccoli. Remember broccoli? Feldman writes, “If I choose not to buy broccoli, others can still buy it at a market price.” Perhaps that is true today. But let’s assume Feldman subscribes to the Obama administration’s argument that the Commerce Power enables Congress to regulate the timing and method of payment for a good that moves in interstate commerce. That would mean that Feldman believes Congress could pass a law stating that all broccoli purchasers must henceforth purchase it through a new method of payment called “broccoli insurance,” where all purchasers pay broccoli insurers a flat fee based on average broccoli consumption within the insurer’s pool of customers, regardless of how much broccoli an individual customer may consume. What would happen if Congress did that? Well, those who consume the most broccoli would be thrilled. They could eat as much broccoli as they want—they could even stucco or decorate their houses with it—while paying much less than they did before. Those who rarely buy broccoli, on the other hand, would see their broccoli bills skyrocket. They may decide not to buy broccoli at all. When they leave the broccoli market, average consumption by

those in the market will rise, as will broccoli premiums. That will cause more low-end broccoli consumers to leave the market, and the cycle will repeat itself. Feldman will recognize this process as—you guessed it—adverse selection caused by asymmetric information. Which, under his limiting principle, means that Congress can swoop down and mandate that Americans purchase broccoli insurance. After all, those people choosing not to buy broccoli are “depriving everyone of [what Feldman calls] a public good.” In sum, Feldman’s limiting principle would allow Congress to force all Americans to buy broccoli. Which is to say, it’s not a limiting principle at all. Like every other so-called limiting principle offered by ObamaCare’s defenders, Feldman’s has no basis in the Constitution or any other law. It is a post hoc rationalization, made by people who are shocked to find themselves before the Supreme Court, defending the constitutionality of their desire to bully others into submission. Lord only knows where these guys get all their self-assuredness. Maybe it’s part of Harvard’s employee benefits package. Update: Prof. Feldman commits another error that I did not initially catch, and therefore perpetuated. It is not asymmetric information that leads to adverse selection in the markets for health/broccoli insurance and causes those markets to collapse. It is the fact that the government’s “community rating” price controls prevent insurance carriers from using information they possess to set premiums in a way that prevents adverse selection. HT: Me. This article appeared on March 28, 2012 on [email protected]

Chapter 33

In Opposing Obamacare, We Were Serious the Whole Time by Ilya Shapiro

“Can you create commerce in order to regulate it?” With those words, Justice Anthony Kennedy sent the legal establishment reeling. Was the Supreme Court really taking seriously the preposterous claims of the Tea Party-inspired hacks who were suing the federal government? Was there really a chance that five justices, acting as would-be partisan hacks themselves, would throw out President Obama’s signature achievement? Could Obamacare, which name everyone is now allowed to use because the administration itself has adopted it, really fall on some technicality about mandating economic activity rather than regulating it when it occurs? In a word, yes. Those of us who have been challenging the constitutionality of the individual health insurance mandate have been serious the whole time. We thought we had put to rest the slurs about our cases being frivolous or political sour grapes when multiple federal judges denied the government’s motions to dismiss them. Or when those same judges struck down the individual mandate. Or when an appellate court, including a judge appointed by President Clinton, affirmed one of those rulings. When 26 states (and two more in separate lawsuits) argue that the constitutional power to regulate interstate commerce—which the Court has interpreted to include the regulation of local economic activity that has a substantial effect on interstate commerce—does not give the federal government the power to force people to buy stuff, maybe there’s a legitimate point of debate. Is it not valid to ask where federal power ends, as it must under the Constitution’s grant of enumerated and therefore limited powers? What legal principle can courts apply to sanction economic mandates with respect to healthcare but not in other areas? At the very least, when the Supreme Court granted an historic six hours of oral argument over three days—akin to Brown v. Board of Education or Roe v. Wade—surely the government’s supporters in the media and academy recognized that there was something to what we were saying. Yet on the eve of the arguments, nationally renowned commentators like Linda Greenhouse and Dahlia Lithwick breezily predicted an easy victory for the government. And 85% of academics and journalists polled by the American Bar Association said the law would be upheld. (Never mind the question of why we need proof that elite liberals overwhelmingly support the elite liberal view.) After all, holding otherwise would take us back to the dark times when children could work in stores and the government couldn’t tell farmers how to go about their business. We all know that only Justice Clarence Thomas would endorse those kinds of hunger games. And so, despite the plaintiffs’ methodical progress and impressive lawyering—led by Paul Clement, possibly the nation’s best advocate—the punditocracy still managed to be caught off-guard when four

justices expressed skepticism about the government’s position. (Thomas was characteristically silent but can indeed be expected to support the structural limits on federal power.) CNN’s own Jeffrey Toobin called it a “train wreck” for the administration, a reaction emblematic of the apoplexy with which the chattering classes reacted to last week’s hearings. There had to be some explanation—beyond the obviously implausible idea that the challengers’ claims had any merit— and indeed two narratives emerged: (1) the government’s lawyer, Solicitor General Donald Verrilli, turned in a horrible performance, and (2) the justices were playing politics. Neither of these excuses is convincing. While it’s true that Verrilli wasn’t at his best—the experienced super-lawyer seemed to strain under a decidedly non-frivolous weight—he ably conveyed the carefully crafted legal positions that the government has advanced all along. And while it’s also true that all the anti-Obamacare votes will come from justices appointed by Republican presidents, that doesn’t mean those justices are acting from partisan motives (any more than the pro-Obamacare justices are). Indeed, unlike any previous “controversial” case, here 72% of the American people—including 56% of Democrats and 54% of those who think the law is a good thing— think the individual mandate is unconstitutional. No, the reason that the government had a bad week is that its position is weak. It has become abundantly clear that the reason that the solicitor general failed to articulate a principled limit to his theory of federal power—despite knowing that this would be the primary question he would face—is that there isn’t one. No matter how much Yale’s Akhil Amar and Northwestern’s Andrew Koppelman protest, we must recognize the validity of an interpretive theory that gives judges the power to enforce the Constitution’s structure. Features such as federalism and the separation of powers are there not as some abstract exercise in applied political theory but to protect individual liberty. Before we even get to the Bill of Rights, which was a hotly debated afterthought, or the political checks on power, we have a constitutional design that denies the federal government the sort of plenary “police” power that states enjoy. That’s why the infamous “broccoli hypothetical” is so telling: Economists say that diet and exercise have a greater effect on taxpayer spending on healthcare than rates of ownership of insurance, so if anything healthy-food and gym-membership mandates have greater constitutional warrant than what we’re dealing with now. By the same token, Congress’s ability to concoct lots of well-intentioned national reform schemes doesn’t give it unfettered means to pursue those noble ends. It is a theory that would allow such unchecked federal power every time Congress acts under a self-declared “national problem” that cannot survive serious constitutional scrutiny. Returning to Justice Kennedy, “here the government is saying that the Federal Government has a duty to tell the individual citizen that it must act, and that is different from what we have in previous cases, and that changes the relationship of the Federal Government to the individual in a very fundamental way.” This article appeared in CNN.com on April 2, 2012.

OBAMACARE’S COST Chapter 34

Is Universal Coverage Comparatively Effective? by Michael F. Cannon

As congressional Democrats prepare to deliver on President Barack Obama’s goal of “expanding coverage to all Americans,”(.pdf) an important question remains unanswered: is universal coverage worth the money? Extending health insurance coverage to the estimated 46 million (.pdf) Americans without it could easily cost $2 trillion over the next 10 years. If the underlying goal is to make people healthier, are there other ways to spend that $2 trillion that would help Americans, including the uninsured, live even longer, healthier lives? There may well be, and one can hardly imagine a more fit topic for comparativeeffectiveness research. Health reformers love a good we-all-know statement, like, “We all know that health insurance is a good investment,” or, “We all know that investing in preventive care saves money.” Health economists, on the other hand, enjoy embarrassing the we-all-know-it-alls. For example, a recent New England Journal of Medicine article concluded, “Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not.” Likewise, economists Helen Levy of the University of Michigan and David Meltzer of the University of Chicago have thrown cold water on the conventional wisdom that expanding health insurance is a good investment. In 2004, Levy and Meltzer reviewed the literature for the Urban Institute and concluded: “There is no evidence at this time that money aimed at improving health would be better spent on expanding insurance coverage than on . . . other possibilities,” such as programs that fund inner-city clinics, screen for discrete diseases such as hypertension, or promote better nutrition. Writing in the Annual Review of Public Health in 2008, Levy and Meltzer reaffirmed that conclusion: “The central question of how health insurance affects health, for whom it matters, and how much, remains largely unanswered at the level of detail needed to inform policy decisions.” “Understanding the magnitude of health benefits associated with insurance is not just an academic exercise,” they explain, “it is crucial to ensuring that the benefits of a given amount of public spending on health are maximized.” Not only is there “no evidence” that universal coverage is the most cost-effective use of our $2 trillion, the benefits may not exceed the costs at all. In a 2008 article for the Journal of Public Economics, Amy Finkelstein of the Massachusetts Institute of Technology and Robin McKnight of Wellesley College reported that even though Medicare achieved universal coverage for the elderly, it had no impact on elderly mortality rates in its first 10 years.

Medicare may (or may not) have improved enrollees’ health in other ways. Yet Finkelstein’s and McKnight’s results leave open the question of whether those and any additional benefits were worth Medicare’s substantial cost. For decades, health reformers have been beating the drums for “evidence-based medicine,” all the while ignoring the lack of evidence behind the push for universal coverage. “Science for thee,” we lecture physicians, “but not for me.” It’s time to start practicing evidence-based health policy. Here’s how. Before Congress spends $2 trillion on reforms of unknown value, it should direct the $1.1 billion it has allocated for “comparative effectiveness” research toward experiments that will tell us whether universal coverage or some other strategy would deliver the most health for the money. The idea has precedent. In the 1970s, at a time when many reformers were demanding to make health care “free” for all, Congress funded a massive social experiment to test the idea. The RAND Health Insurance Experiment startled reformers by showing that “free” care cost far more than mere catastrophic health insurance, yet offered little or no additional improvements in health. Levy and Meltzer note that “definitive answers” will come only by “investing in social experiments designed to answer specific questions about the value of improved health insurance coverage or other policies to improve health.” George Mason University economist Robin Hanson has even started a petition to demand a new RAND-like experiment, which he estimates would cost a mere $500 million over 10 years. I oppose spending taxpayer dollars on such research, for reasons both principled and practical. But if Congress is going to spend the money anyway, the least it could do is let us know whether universal coverage is a comparatively effective use of our $2 trillion. This article appeared on KaiserHealthNews.org on May 31, 2009.

Chapter 35

The $1.5 Trillion Fraud by Michael F. Cannon

If House Democrats hold a vote on their health-care overhaul this weekend, they might as well vote on abolishing the Congressional Budget Office too. It would be no more audacious—and much more honest —than their current strategy for hiding the true cost of their legislation. Never mind the everyday budget gimmicks House Democrats have used, such as removing $250 billion of deficit spending to be voted on separately. Or claiming their bill would cost just $894 billion—around $400 billion less than the CBO actually projected. We’ve seen this kind of trickery plenty in recent years; to suppress an inconvenient cost estimate of its proposed Medicare drug entitlement, the Bush administration threatened to fire Medicare’s chief actuary. Deceptions on this scale are child’s play, at least when compared to what has to be the biggest fiscal obfuscation in the history of American politics: The current leadership has rigged the legislation so that 60 percent of its total cost will not be made public by the CBO in advance of the House vote. Here’s how they did it. The centerpiece of the bills currently under consideration is not the “public option,” but the “individual mandate”—a legal requirement that all U.S. residents purchase health insurance, on penalty of fines and/or imprisonment. The CBO describes an individual mandate as “an unprecedented form of federal action” whose closest analogue in federal law is the draft. But as President Obama told a joint session of Congress, the rest of the legislation won’t work unless the federal government forces Americans to purchase health insurance. President Clinton’s ill-fated health plan had an individual mandate, too. Back in 1994, the CBO decided that since “the mandatory premiums . . . would constitute an exercise of sovereign power,” the agency would treat all premiums as federal revenues, including them in the federal budget. That revealed to the public the full cost of Clinton’s health plan. Clinton’s secretary of health and human services, Donna Shalala, called the CBO’s decision “devastating.” Journalist Ezra Klein writes that it “helped kill the bill.” Rather than admit the individual mandate’s unpopularity and move on, congressional Democrats simply ensured that its costs would not appear in the federal budget this time around by gaming the CBO’s rule for what constitutes “federal revenues.” The CBO explains it will not count mandatory premiums as federal revenues if the individual mandate leaves consumers with what the CBO considers a “sufficient” or “meaningful” or “substantial” degree of choice among health plans. That rule is both amorphous and arbitrary. (For example, it presumes that the freedom not to purchase health insurance—which an individual mandate would eliminate—is not “meaningful.” Millions of Americans would disagree.) More important, evading that rule doesn’t make an individual mandate any less compulsory, or any less costly. It just hides those costs by pushing them

off-budget. Obama budget director Peter Orszag laid the groundwork for this feat. While director of the CBO in 2007 and 2008, he fostered a more collaborative relationship between the CBO and members of Congress, which enabled the agency to provide behind-the-scenes guidance to Democrats crafting their mandate. That’s why the cost of the Democrats’ individual mandates appears nowhere in the half-dozen or more “preliminary cost estimates” the CBO has completed on various Democratic health-care bills. In Massachusetts, which has enacted what is essentially the Democrats’ health plan, mandatory premiums account for about 60 percent of overall costs, according to the Massachusetts Taxpayers Foundation. On-budget government spending is just 40 percent. By my count, mandatory premiums accounted for a similar share of the Clinton health plan’s projected cost. So while the CBO estimates that the coverage expansions in the House Democrats’ legislation would trigger about $1 trillion of new federal spending over ten years, the actual cost of those coverage expansions is more like $2.5 trillion. The CBO exists to bring honest accounting to the federal government. House Democrats are gaming the CBO, subverting this purpose. Anyone who cares about honest accounting or transparency in government should put the brakes on this vote until the American people have all the facts. This article appeared in the National Review (Online) on November 6, 2009.

Chapter 36

Bland CBO Memo, or Smoking Gun? by Michael F. Cannon

This weekend, the Congressional Budget Office released “a very strange memo“ titled, “Budgetary Treatment of Proposals to Regulate Medical Loss Ratios.” You wouldn’t know it from the title, but that little memo is the smoking gun that shows how congressional Democrats have very carefully hidden more than half the cost of their health care bills. First, a little history. Like both the House and Senate bills, the Clinton health plan would have mandated that individuals and employers purchase private insurance. In its 1994 score of the Clinton plan, Bob Reischauer‘s CBO included those mandated “private” payments in the federal budget—i.e., as federal revenues and federal expenditures. And yet, none of the CBO scores of this year’s bills include the costs of similar individual/employer mandates as federal revenues or federal spending. My read of the CBO’s score of the Clinton health plan is that the private-sector mandates accounted for around 60 percent of the Clinton health plan’s total cost, the remainder being (traditional) government spending. So how is it that the CBO made the full cost of the Clinton health plan apparent to the public in 1994, but may now be revealing only 40 percent of the cost of the Obama health plan? For some time, I’ve suspected the answer is that congressional Democrats have very carefully tailored their individual and employer mandates to avoid CBO’s definition of what shall be counted in the federal budget. Democrats are still smarting over the CBO’s decision in 1994. By revealing the full cost of the Clinton plan, the CBO helped to kill the bill. Since then, keeping the cost of their private-sector mandates out of the federal budget has been Job One for Democratic health wonks. While head of the CBO, Obama’s budget director Peter Orszag altered the CBO’s orientation to make it more open and collaborative. One of the things about which the CBO has been more open is the criteria it uses to determine whether to include mandated private-sector spending in the federal budget. The CBO even published a paper on the topic. Read this profile of Orszag by Ezra Klein, and you’ll see that those criteria were also a likely area of collaboration with lawmakers. The Medical Loss Ratios memo is the smoking gun. It shows that indeed, Democrats have been submitting proposals to the CBO behind closed doors and tailoring their private-sector mandates to avoid having those costs appear in the federal budget. Proposals that would result in a complete cost estimate—such as the proposal by Sen. Rockefeller discussed in the Medical Loss Ratios memo—are dropped. Because we can’t let the public see how much this thing really costs. Crafting the private-sector mandates such that they fall just a hair short of CBO’s criteria for inclusion in the federal budget does not reduce their cost, nor does it make those mandates any less binding. But it dramatically reduces the apparent cost of the legislation. It is the reason we’re all talking about an $848

billion Reid bill, rather than a $2.1 trillion Reid bill. If someone sold you a house, or a car, or a mutual fund this way, we would put them in jail. This article appeared on December 16, 2009 on [email protected]

Chapter 37

Oops, Maybe ObamaCare’s Cost Controls Won’t Work after All by Michael F. Cannon

One of ObamaCare’s big selling points was that it would launch lots of pilot programs so that Medicare bureaucrats could learn how to reduce health care costs and improve the quality of care. Yesterday, the Congressional Budget Office threw cold water on the idea. In 2010, Peter Orszag and Ezekiel Emanuel explained the promise of ObamaCare’s pilot programs: [The law’s] pilot programs involving bundled payments will provide physicians and hospitals with incentives to coordinate care for patients with chronic illnesses: keeping these patients healthy and preventing hospitalizations will be financially advantageous . . . And the secretary of health and human services (HHS) is empowered to expand successful pilot programs without the need for additional legislation. Atul Gawande wrote even more glowingly: The bill tests, for instance, a number of ways that federal insurers could pay for care. Medicare and Medicaid currently pay clinicians the same amount regardless of results. But there is a pilot program to increase payments for doctors who deliver high-quality care at lower cost, while reducing payments for those who deliver low-quality care at higher cost. There’s a program that would pay bonuses to hospitals that improve patient results after heart failure, pneumonia, and surgery. There’s a program that would impose financial penalties on institutions with high rates of infections transmitted by… You get the idea. The thing is, pilot programs in Medicare are not new. And in a review of dozens of Medicare pilot programs released yesterday, the Congressional Budget Office revealed they aren’t very successful, either: The disease management and care coordination demonstrations comprised 34 programs . . . In nearly every program, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program, when the fees paid to the participating organizations were considered . . . Only one of the four demonstrations of value-based payment has yielded significant savings for the Medicare program. No big deal, you say. Startups fail all the time. What’s important is not that 37 startups failed, but that

one succeeded. That’s how things are supposed to work. But as Alain Enthoven explained to Gawande, the really perverse thing about Medicare pilot programs is that even the successful ones die: Gawande got it wrong about pilots . . . The Medical Industrial Complex does not want such pilots and often strangles them in the crib. For example, nothing lasting and significant came of the pilot to reward people for getting their heart bypass surgery at regional centers of excellence. I don’t remember the details of how it died, but I believe it was tried and went nowhere. No doubt every hospital thought it was a center of excellence and wanted to be so rewarded. Another more recent example is durable medical equipment. David Leonhardt had an excellent article in the New York Times on June 25, 2008 called “High Medicare Costs Courtesy of Congress.” Someone had sold the good idea that prices of durable medical equipment should be determined by competition, and there was a provision in law for pilots to test competition. The industry lobbied hard to stop it and promulgated scare stories. “Grandma won’t get her oxygen.” Leonhardt recounts how Democratic and Republican leaders got together and postponed the pilot— and, I suspect, postponed it forever. There were proposals to test health plan competition, fought off by the industry of course. So this is not a fertile political environment for pilots. In fact, one of the most important lessons that has come out of the current “reform” process is the enormous power of the medical industrial complex and their large financial contributions and armies of lobbyists to block any significant cost containment. Rather than a reason for more government interference in health care, the death of these pilots is a consequence of government interference. If the federal Medicare program weren’t such an enormous player in the U.S. health care sector, industry lobbyists (and their servants in Congress) wouldn’t have so many ways to protect themselves from competition by more efficient providers. Enthoven summed up ObamaCare’s approach to cost control best: The American people are being deceived. We are being told that health expenditure must be curbed, therefore “reform is necessary.” But the bills in Congress, as Gawande acknowledges, do little or nothing to curb the expenditures. When the American people come to understand that “reform” was not followed by improvement, they are likely to be disappointed. Our anguish is only intensified by the fact that the Republicans are no better at fiscal responsibility, probably worse as they demagogue reasonable attempts to limit expenditures. Congress is sending the world an unmistakable signal that it is unable or unwilling to control health expenditures and the fiscal deficit. That is not going to make it easier to sell Treasury bonds on international markets. I fear this will lead to higher interest rates. FYI, Enthoven wrote those words in 2009. This article appeared on January 19, 2012 on [email protected]

THE FOLLY OF CENTRALIZED ECONOMIC PLANNING Chapter 38 A Closer Look at Those Industry Deals by Michael F. Cannon

On May, President Barack Obama announced that industry lobbyists had agreed to reduce the growth of health care spending by 1.5 percentage points each year, which would yield just enough savings to cover the uninsured. The lobbyists quickly denied that was the agreement, prompting an administration official to backtrack (“the president misspoke”), before un-backtracking (“I don’t think the president misspoke”). Since then, the administration has announced similar deals with industry groups who have supposedly put self-interest aside to make a contribution to health care reform. If only that were true. Far from being “game-changers,” those agreements are the same old Washington game of bribes, backroom deals, profiteering and protectionism—and a harbinger of what health care will look like if the president’s reforms succeed. In June, the pharmaceutical lobby PhRMA agreed to give 50 percent discounts to seniors in Medicare’s “doughnut hole,” where enrollees now pay 100 percent of their drug costs. President Obama hailed the agreement as a “significant breakthrough,” while PhRMA spun it as their $80 billion contribution toward health care reform. Yet the PhRMA agreement would not save taxpayers $80 billion. It would cost them $80 billion, and then some. Under the agreement, the full price of each drug would continue to count toward seniors’ catastrophic deductible. As a result, even more seniors would exceed that deductible, after which taxpayers would pay 95 percent of their drug costs. Obama also agreed to oppose stricter price controls for government purchases. PhRMA members agreed to cut their prices for seniors only because Obama agreed that taxpayers would buy more drugs at higher prices. Think about it: Would drug companies enter this agreement unless they knew they would be net winners? Lobbyists never advocate less revenue for their members. An agreement reached with Wal-Mart was also deceptively self-serving. Two weeks ago, the nation’s largest private employer pledged to support a key Obama priority: a mandate requiring all employers to offer health benefits. An administration official called Wal-Mart’s support for an employer mandate “significant.” Yet Wal-Mart’s announcement was less Nixon going to China than, say, Stalin going to China. As one Wal-Mart lobbyist candidly explained to me, the company supports an employer mandate because it would primarily harm Wal-Mart’s competitors. (The 315,000 jobs an employer mandate would destroy? Collateral damage.) Wal-Mart’s competitors are not amused. President Obama has been working the same protection racket on other employers. According to the New York Times , “Rahm Emanuel, the White House chief of staff, [said] chief executives of other

companies—he did not specify which—had also expressed interest in embracing an employer mandate.” Finally, last week Vice President Joe Biden announced that three hospital groups agreed to support $155 billion in cuts in federal payments to hospitals. “I want to know what the ‘ask’ is,” fellow Democrat and acting Senate Health, Education, Labor and Pensions Committee Chairman Chris Dodd, Conn., responded skeptically. “The ‘ask’ sometimes can exceed the value of your cost savings.” Dodd was right to be skeptical. The Obama administration essentially issued those groups an insurance policy. To guarantee that the groups would get at least $155 billion back from the government in the form of newly insured customers, the administration agreed that the new subsidies would start flowing immediately, while the pay cuts would take effect over time. That means the pay cuts may never take effect at all: physicians have been blocking their own scheduled pay cuts for nearly a decade. The administration further bribed the hospital groups with unspecified protections from competing physician-owned hospitals as well as protections for the same inefficient hospitals Obama has criticized. Last month, President Obama compared the Mayo Clinic to McAllen, Texas, “where costs are actually a third higher than they are at Mayo, but the outcomes are worse.” Yet Obama agreed that any cuts in Medicare’s hospital payments would be across-the-board, rather than targeted at high-cost hospitals. Across-the-board cuts would actually penalize Mayo for its efficiency, while still paying McAllen hospitals more. Low-cost hospitals, including an association that represents Mayo, have formed a coalition to fight across-the-board cuts. Each agreement was negotiated behind closed doors, away from public scrutiny. All are contingent on the favored groups getting something they want, and all “savings” could be undone by future lobbying. To paraphrase George Bailey, the industry isn’t selling—the industry is buying. President Obama’s idea of health care reform is to give the federal government sweeping new powers to dictate what Americans will purchase and how much they will pay. If you want to know who will benefit from that approach, who will pay and who will be pulling the strings, the president is doing his best to show you. This article appeared on KaiserHealthNews.org on July 16, 2009.

President Senate Finance Committee chairman Max Baucus (D-MT),2 and other leading Democrats have proposed creating a new government health insurance program as an “option” for Americans under the age of 65. This program would operate within the context of a new, federally regulated market—typically described as a “National Health Insurance Exchange.” House Speaker Nancy Pelosi (D-CA)3 and four House caucuses representing more than 100 Democrats4 have stated that a new government health insurance program modeled on Medicare is the sine qua non of health care reform. Sixteen Democratic senators have signed a letter signaling their support.5 Senate Health, Education, Labor, and Pensions Committee chairman Edward M. Kennedy (D-MA) has proposed legislation that would create such a program,6 as have three key House committees.7 Others have suggested that Congress should adopt a different model. Senate Budget Committee chairman Kent Conrad (D-ND) and Sen. Charles Schumer (D-NY) have proposed that Congress create one or more health-insurance “cooperatives,” although each endorses different structures and different levels of government support. Cooperatives are member-run health plans that already exist in many areas of the country; for instance, Group Health Cooperative already covers 580,000 Americans in the states of Washington and Idaho. 8 Schumer proposes that Congress spend $10 billion to create a single nationwide cooperative, which would be governed by a federal board and endowed with the power to use Medicare-like price controls.9 Conrad proposes multiple cooperatives10 with start-up subsidies in the neighborhood of $4 billion.11 Advocates of a new government health insurance program claim that government provides coverage more efficiently than the private sector. University of California–Berkeley political scientist Jacob Hacker writes: The public Medicare plan’s administrative overhead costs (in the range of 3 percent) are well below the overhead costs of large companies that are self-insured (5 to 10 percent of premiums), companies in the small group market (25 to 27 percent of premiums), and individual insurance (40 percent of premiums).12

Supporters claim they are willing to put government to the test by having it compete against private plans in the context of a new government-run “exchange.” President Obama claims that a new government program “gives consumers more choices, and it helps keep the private sector honest, because there’s some competition out there.”13 The House Democrats’ legislation would create a “public health insurance option” that would be “self-sustaining and compet[e] on [a] ‘level field’ with private insurers.”14 Columnist E. J. Dionne writes, “The public-option idea . . . would allow the United States to move gradually toward a government-run system if—and only if—a substantial number of consumers freely chose to join such a plan. The market would test the idea’s strength.”15 A full accounting, however, shows that government programs are less efficient than private insurance. Administrative costs are higher in government programs such as Medicare, because they avoid administrative activities that increase efficiency and incur other administrative costs that are purely wasteful. Government programs also suppress innovation, and thereby reduce the quality of care for all patients, whether publicly or privately insured. The central problem with proposals to create a new government program is not that government is less efficient than private insurers, however, but that government can hide its inefficiencies and draw consumers away from private insurance, despite offering an inferior product. If the government plan’s premiums reflected its full costs—and private insurance premiums reflected only their actual costs— there would be no reason not to let the government enter the market. As Dionne suggests, the market would test the idea’s strength. Yet government possesses both the power to hide its true costs (which keeps its premiums artificially low) and to impose costs on its competitors (which unnecessarily pushes private insurance premiums higher). It makes no difference whether a new program adopts a “cooperative” model or any other. The government possesses so many tools for subsidizing its own program and increasing costs for private insurers—and has such a long history of subsidizing and protecting favored enterprises—that unfair advantages are inevitable. This is in no small part because supporters of a new government program want it to have unfair advantages. Literally Ousting Patients from Their Health Plans In a speech to the American Medical Association, President Obama reiterated a promise that he has made repeatedly since the 2008 presidential campaign: No matter how we reform health care, we will keep this promise to the American people. If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you’ll be able to keep your health care plan, period. No one will take it away, no matter what.16 After the Congressional Budget Office estimated that as many as 15 million Americans could lose their existing coverage under Senator Kennedy’s legislation, 17 the Associated Press reported, “White House officials suggest the president’s rhetoric shouldn’t be taken literally.”18 Indeed, a new government program would literally oust millions of Americans from their current health plans and threaten their relationships with their doctors, as employers choose to drop their current employee health plans and as private health plans close down. A Lewin Group analysis estimated that Obama’s campaign proposal would move 32 million Americans into a new government-run plan. 19 Lewin subsequently estimated that if Congress used Medicare’s price controls and opened the new program to everyone, it could pull 120 million Americans out of private insurance—more than half of the

private market.20 The share of Americans who depend on government for their health care would rise from just over one-quarter to two-thirds.21 Many of those millions would be involuntarily ousted from their current health plans—much like President Obama suggested ousting 10 million seniors22 from their private Medicare Advantage plans and forcing them into the traditional Medicare program. 23 Yet even those who voluntarily chose a new government program over their existing coverage would do so not because the government program provides better value for the money, but because the government program would hide some of its cost. A health insurance “exchange,” where consumers choose between private health plans with artificially high premiums and a government program with artificially low premiums, would not increase competition. Instead, it would reduce competition by driving lower-cost private health plans out of business. President Obama’s vision of a health insurance exchange is not a market, but a prelude to a government takeover of the health care sector. In the process, millions of Americans would be ousted from their existing health plans, and all would suffer the consequences of government-run health care.

Is Government More Efficient? Supporters of a new government program note that private insurers spend resources on a wide range of administrative costs that government programs do not. These include marketing, underwriting, reviewing claims for legitimacy, and profits. The fact that government avoids these expenditures, however, does not necessarily make it more efficient. Many of the administrative activities that private insurers undertake serve to increase the insurers’ efficiency. Avoiding those activities would therefore make a health plan less efficient. Existing government health programs also incur administrative costs that are purely wasteful. In the final analysis, private insurance is more efficient than government insurance. Administrative Costs Time magazine’s Joe Klein argues that “the profits made by insurance companies are a good part of what makes health care so expensive in the U.S. and that a public option is needed to keep the insurers honest.”24 All else being equal, the fact that a government program would not need to turn a profit suggests that it might enjoy a price advantage over for-profit insurers. If so, that price advantage would be slight. According to the Congressional Budget Office, profits account for less than 3 percent of private health insurance premiums.25 Furthermore, government’s lack of a profit motive may not be an advantage at all. Profits are an important market signal that increase efficiency by encouraging producers to find lower-cost ways of meeting consumers’ needs. 26 The lack of a profit motive could lead a government program to be less efficient than private insurance, not more. Moreover, all else is not equal. Government programs typically keep administrative expenditures low by avoiding activities like utilization or claims review. Yet avoiding those activities increases overall costs. The CBO writes, “The traditional fee-for-service Medicare program does relatively little to manage benefits, which tends to reduce its administrative costs but may raise its overall spending relative to a more tightly managed approach.”27 Similarly, the Medicare Payment Advisory Commission writes: [The Centers for Medicare & Medicaid Services] estimates that about $9.8 billion in erroneous

payments were made in the fee-for-service program in 2007, a figure more than double what CMS spent for claims processing and review activities. In Medicare Advantage, CMS estimates that erroneous payments equaled $6.8 billion in 2006, or approximately 10.6 percent of payments. . . . The significant size of Medicare’s erroneous payments suggests that the program’s low administrative costs may come at a price.28 CMS further estimates that it made $10.4 billion in improper payments in the fee-for-service Medicare program in 2008.29 Medicare keeps its measured administrative-cost ratio relatively low by avoiding important administrative activities (which shrinks the numerator) and tolerating vast amounts of wasteful and fraudulent claims (which inflates the denominator).30 That is a vice, yet advocates of a new government program praise it as a virtue.31 Medicare also keeps its administrative expenditures down by conducting almost no quality-improvement activities. Journalist Shannon Brownlee and Obama adviser Ezekiel Emanuel write: [S]ome administrative costs are not only necessary but beneficial. Following heart-attack or cancer patients to see which interventions work best is an administrative cost, but it’s also invaluable if you want to improve care. Tracking the rate of heart attacks from drugs such as Avandia is key to ensuring safe pharmaceuticals.32 According to the CBO, private insurers spend nearly 1 percent of premiums on “medical management.”33 The fact that Medicare keeps administrative expenditures low by avoiding such qualityimprovement activities may likewise result in higher overall costs—in this case by suppressing the quality of care. Supporters who praise Medicare’s apparently low administrative costs often fail to note that some of those costs are hidden costs that are borne by other federal agencies, and thus fail to appear in the standard 3-percent estimate.34 These include “parts of salaries for legislators, staff and others working on Medicare, building costs, marketing costs, collection of premiums and taxes, accounting including auditing and fraud issues, etc.”35 Also, Medicare’s administrative costs should be understood to include the deadweight loss from the taxes that fund the program. Economists estimate that it can easily cost society $1.30 to raise just $1 in tax revenue, and it may sometimes cost as much as $2.36 That “excess burden” of taxation is a very real cost of administering (i.e., collecting the taxes for) compulsory health insurance programs like Medicare, even though it appears in no government budgets. Comparing administrative expenditures in the traditional “fee-for-service” Medicare program to private Medicare Advantage plans can somewhat control for these factors. Hacker cites a CBO estimate that administrative costs are 2 percent of expenditures in traditional Medicare versus 11 percent for Medicare Advantage plans. He writes further: “A recent General Accounting Office report found that in 2006, Medicare Advantage plans spent 83.3 percent of their revenue on medical expenses, with 10.1 percent going to nonmedical expenses and 6.6 percent to profits—a 16.7 percent administrative share.”37 Yet such comparisons still do not establish that government programs are more efficient than private insurers. The CBO writes of its own estimate: “The higher administrative costs of private plans do not

imply that those plans are less efficient than the traditional FFS program. Some of the plans’ administrative expenses are for functions such as utilization management and quality improvement that are designed to increase the efficiency of care delivery.”38 Moreover, a portion of the Medicare Advantage plans’ administrative costs could reflect factors inherent to government programs rather than private insurance. For example, Congress uses price controls to determine how much to pay Medicare Advantage plans. If Congress sets those prices at supracompetitive levels, as many experts believe is the case,39 then that may boost Medicare Advantage plans’ profitability beyond what they would earn in a competitive market. Those supracompetitive profits would be a product of the forces that would guide a new government program—that is, Congress, the political system, and price controls—rather than any inherent feature of private insurance. Economists who have tallied the full administrative burden of government health insurance programs conclude that administrative costs are far higher in government programs than in private insurance. In 1992, University of Pennsylvania economist Patricia Danzon estimated that total administrative costs were more than 45 percent of claims in Canada’s Medicare system, compared to less than 8 percent of claims for private insurance in the United States.40 Pacific Research Institute economist Ben Zycher writes that a “realistic assumption” about the size of the deadweight burden puts “the true cost of delivering Medicare benefits [at] about 52 percent of Medicare outlays, or between four and five times the net cost of private health insurance.”41 Administrative costs can appear quite low if you only count some of them. Medicare hides its higher administrative costs from enrollees and taxpayers, and public-plan supporters rely on the hidden nature of those costs when they argue in favor of a new government program. Cost Containment vs. Spending Containment Advocates of a new government health care program also claim that government contains overall costs better than private insurance. Jacob Hacker writes, “public insurance has a better track record than private insurance when it comes to reining in costs while preserving access. By way of illustration, between 1997 and 2006, health spending per enrollee (for comparable benefits) grew at 4.6 percent a year under Medicare, compared with 7.3 percent a year under private health insurance.”42 In fact, looking at a broader period, from 1970 to 2006, shows that per-enrollee spending by private insurance grew just 1 percentage point faster per year than Medicare spending, rather than 2.7 percentage points.43 That still omits the 1966–1969 period, which saw rapid growth in Medicare spending. More importantly, Hacker’s comparison commits the fallacy of conflating spending and costs. Even if government contains health care spending better than private insurance (which is not at all clear), it could still impose greater overall costs on enrollees and society than private insurance. For example, if a government program refused to pay for lifesaving medical procedures, it would incur considerable nonmonetary costs (i.e., needless suffering and death). Yet it would look better in Hacker’s comparison than a private health plan that saved lives by spending money on those services. Medicare’s inflexibility also imposes costs on enrollees. Medicare took 30 years longer than private insurance to incorporate prescription drug coverage into its basic benefits package. The taxes that finance Medicare impose costs on society in the range of 30 percent of Medicare spending.44 In contrast, there is no deadweight loss associated with the voluntary purchase of private health insurance. Hacker nods in the direction of nonspend-ing costs when he writes, “Medicare has maintained high

levels of . . . patient access to care.”45 Yet there are many dimensions of quality other than access to care. It is in those areas that government programs impose their greatest hidden costs, on both publicly and privately insured patients. Government Programs Suppress Quality, Cost Lives Supporters also claim that government programs outperform private health insurance on quality. On the surface, the quality of medical care in government programs tends to be similar to, or worse than, the quality of care under private insurance. This may be largely due to the fact that government programs uniformly lag private insurance in adopting quality innovations. Beneath the surface, however, government programs suppress the quality of care for all patients, whether publicly or privately insured. Researchers estimate that patients receive high-quality, evidence-based care only about half of the time, regardless of whether they are enrolled in Medicare, Medicaid, or private insurance.46 A recent Minnesota study found, however, “On eight of the nine statewide measures, performance in achieving high-quality care was significantly lower at both the statewide and medical group levels for [Medicaid and other government programs] compared with [private insurance].”47 Patients with Medicaid coverage experience more unmet medical needs than similar patients with private insurance.48 Studies have found that Medicaid patients suffer worse outcomes than similar privately insured patients when it comes to cancer,49 unstable angina,50 and coronary artery bypass graft surgery. 51 The Veterans’ Health Administration appears to outperform private insurance on some dimensions of quality, 52 but exhibits serious deficiencies in others.53 President Obama’s secretary of Health and Human Services, Kathleen Sebelius, has called the government-run Indian Health Service a “historic failure.”54 Nevertheless, supporters make the demonstrably false claim that government programs are more innovative than private insurance. Hacker writes, “Medicare has been slow to adopt quality innovations —though generally quicker than private health plans.”55 Peter Harbage and Karen Davenport of the Center for American Progress cite Medicare’s policy on “never events”—severe medical errors that should “never” happen—as proof of government’s superior ability to promote quality: “Witness steps such as Medicare’s refusal to pay medical care providers for ‘never events,’ where a patient suffers a knowable and catastrophic mistake, such as having the wrong limb removed. This is something other major insurers are now adopting.”56 In reality, Medicare and other government programs uniformly lag private insurers when it comes to quality innovations. For example, private insurers began experimenting with “pay-for-performance” financial incentives almost an entire decade before Medicare.57 “Never events” provide an even clearer illustration. In 2003, an estimated 181,000 severe medical errors occurred in hospitals alone.58 Throughout its 43-year history, Medicare has actually encouraged such errors by financially rewarding health care providers when an error leads to more services, and financially penalizing providers who reduce error rates.59 In October 2008, Medicare eliminated those perverse incentives for a short list of medical errors called “never events.” That policy will likely discourage some medical errors by forcing providers to pay for some of the associated costs. Yet the first private health plan to force providers to bear the full financial cost of all medical errors was offered by the Ross-Loos Clinic in 1929.60 Kaiser Permanente has done so since the 1940s. Medicare didn’t even play a leading role on “never events” among fee-for-service plans, as Harbage and Davenport claim.

HealthPartners of Minnesota stopped paying for “never events” in January 2005.61 Medicare merely followed suit. Stagnation Costs Lives Government programs are not merely slow to innovate, they are outright hostile to quality innovations. Government programs inject rigidity into health care markets that suppresses the quality of care for publicly and privately insured patients alike. The result is greater morbidity and mortality. This can be seen most clearly in the way government suppresses competition between different methods of paying doctors, hospitals, and other health care providers. As noted above, Medicare financially rewards medical errors and penalizes error-reduction efforts because it pays providers on a fee-for-service basis. Fee-for-service payment, as the name suggests, means that providers collect an additional fee for each additional service they provide. Conversely, if providers deliver fewer services, they collect less revenue. Fee-for-service payment thus creates a perverse incentive: if low-quality care (e.g., a medical error, poor coordination between providers, insufficient attention to medical evidence) results in a patient requiring more services, then low-quality providers will receive more revenue than providers who adopt quality innovations. According to the New York Times, for example: Park Nicollet Health Services, a hospital and clinic system based in St. Louis Park, Minn[esota] . . . started . . . spending as much as $750,000 annually on more nurses and on sophisticated software to track heart failure patients after they left the hospital. It reduced readmissions for such patients to only 1 in 25, down from nearly 1 in 6. But the reduction has been a losing proposition. Although the effort saved Medicare roughly $5 million a year, Park Nicollet is not paid to provide the followup care. Meanwhile, fewer returning hospital patients mean lower revenue for Park Nicollet. “We’ve kept it up out of a sense of moral obligation to these patients, but we’re getting killed,” said David K. Wessner, chief executive of Park Nicollet. “We will totally run out of gas.”62 Medicare suppresses countless quality innovations by making them “a losing proposition.” A free market would use competition from different methods of paying providers to keep those perverse incentives in check. Under “prepayment” or “capitation,” for example, providers receive a flat fee to provide medical care for a given patient or group of patients. Group Health Cooperative is an example of an integrated, prepaid health plan. Prepayment rewards providers for avoiding unnecessary and harmful services: whatever money providers save by avoiding medical errors, for example, the providers get to keep. It is no coincidence that prepaid health plans, like Kaiser Permanente, lead the market in innovations such as coordinated care and electronic medical records, which help avoid unnecessary services. Prepayment also creates its own perverse incentive: providers get to keep whatever money they save by denying access to needed care as well. In a free market, however, competition from fee-for-service providers would force them not to stint on necessary care. By the same token, competition from prepaid plans would force fee-for-service providers to coordinate care, offer electronic medical records, and avoid medical errors. Government health insurance programs— principally Medicare—block competition between different payment systems, and therefore dramatically reduce the quality of care. As the largest purchaser of medical services in the United States, Medicare accounts for two- thirds to four-fifths of revenues for many hospitals and specialties.63 Medicare’s influence is so vast that hospitals and other providers organize the delivery of medical care around the financial incentives it creates. Providers like Park

Nicollet Health Services cannot stay in business by providing high-quality coordinated care, because that means less revenue from Medicare. Because privately insured patients use the same doctors and hospitals, that means Medicare suppresses the quality of care even for privately insured patients.64 The main reason that the U.S. health care sector lacks coordinated care, electronic medical records, and comparative-effectiveness research is that government rewards providers who avoid these quality innovations and penalizes providers who adopt them. The main reason that as many as 100,000 Americans die from medical errors each year is that the nation’s largest health care purchaser rewards providers who tolerate medical errors and punishes providers who reduce them. Congress cannot solve this problem by reforming Medicare’s payment system, creating a new program that uses a different payment system, or attempting to incorporate such competition into a government program. All methods of paying health care providers create perverse incentives. If Medicare or a new program adopts the payment system used at Group Health Cooperative, Congress will merely trade the perverse incentives of fee-for-service payment (uncoordinated care, medical errors) for those of prepayment (less provider choice, greater rationing). Only competition between different payment systems can hold those perverse incentives in check. Yet government programs like Medicare and Medicaid stifle such competition. Medicare Advantage attempts to allow such competition, yet different health plans with different payment systems constantly lobby Congress for special advantages. Meanwhile, politicians, such as President Obama, propose eliminating such competition entirely. Harbage and Davenport write that a new government program “will create incentives for effective performance just as today’s Medicare program promotes quality care alongside cost containment.”65 That is precisely the problem. A new government program would suppress quality, just as Medicare has, by further stifling competition between payment systems. Sebelius says that making Medicare “a strong and sustainable program depends on our ability to fix what’s broken in the rest of the system.”66 Sebelius has it exactly backward: Medicare is what’s broken in the rest of the system. We need not look to Canada to find horror stories about government-run health care. Estimates of 100,000 deaths each year in the United States from medical errors should be frightening enough.67 A new government program, whether modeled on Medicare or not, would further suppress health care quality and cause additional morbidity and mortality.

The Fair-Competition Fantasy President Obama admits, “I think there can be some legitimate concerns on the part of private insurers that if any public plan is simply being subsidized by taxpayers endlessly, that over time they can’t compete with the government just printing money.”68 Nevertheless, supporters claim that Congress can create a new government program that competes with private insurers on a level playing field. The “Blue Dog Coalition” of moderate House Democrats has offered several criteria that a new program would have to satisfy in order to do so.69 The Blue Dogs insist, for example, that the program would have to be completely self-sustaining (i.e., premium revenue would cover all costs), that the government not leverage its market power to favor the new program, and that government not enact any regulations that favor a new government program over private insurers. Supporters such as Len Nichols and John Bertko

of the New America Foundation claim that a new program can satisfy those conditions.70 Yet the government need neither subsidize its own program with taxpayer money, nor newly printed money, nor must it do so “endlessly,” to supplant private insurance with an inferior option. Indeed, government has countless other ways to prevent the true cost of a new program from appearing in its premiums, and to increase the premiums of its competitors. Moreover, government’s long history of subsidizing, protecting, and bailing out favored enterprises shows that such special advantages would be inevitable. For example, Amtrak requires repeated taxpayer subsidies to stay afloat. 71 And Congress famously bailed out Fannie Mae and Freddie Mac. Congress has made Medicare increasingly less self-sustaining over time. When Congress created Medicare in 1965, enrollee premiums covered 50 percent of the cost of physician services. Under pressure from Medicare enrollees, subsequent Congresses gradually reduced that share to 25 percent. The U.S. Postal Service is similarly unable to sustain itself. According to one critic: Make no mistake . . . the Postal Service is not self-sufficient. It is kept afloat by a number of hidden taxpayer subsidies. For starters, it has a monopoly on First Class and Standard mail. No private company can deliver a letter for less than $3 or twice what USPS charges, whichever is greater. . . . Meanwhile, USPS is immune from antitrust lawsuits and exempt from taxes on its massive realestate holdings. . . . It enjoys power of eminent domain. And it doesn’t even pay parking tickets.72 It calculates the amount of corporate income tax it would owe if it were a private company—and then pays that amount to itself.73 Likewise, state governments have repeatedly crowded out private insurance in markets for workers’ compensation insurance, crop and flood insurance, and reinsurance for medical malpractice and natural disasters, according to University of Pennsylvania economist Scott Harrington, because “the public sector is supported by various types of subsidies or special rules that allow it to compete with the private sector.”74 Direct Subsidies Among the many ways that Congress could favor a new government program is through direct subsidies—that is, real resources provided to the government program, yet withheld from private insurers: • The federal and state governments finance Medicaid and the State Children’s Health Insurance Program almost entirely through tax revenue. As a result, those programs crowd out private insurance among individuals who could otherwise obtain coverage on their own.75 Likewise, taxpayer subsidies fund nearly 90 percent of Medicare spending, which helps that program almost completely crowd out private health insurance for the elderly.76 • Creating a new program around Medicare’s existing infrastructure, as some supporters propose, would bestow start-up subsidies not available to new private health plans.77 Senator Schumer has insisted that a government-sponsored “co-operative” receive $10 billion in start-up subsidies. • The leading Democratic proposals would create a “risk-adjustment” mechanism that would essentially tax all health plans to compensate those that attract a disproportionate share of high-cost patients and/or that do little to reduce wasteful expenditures.78 Whether a new government program

proves to be more attractive to high-cost patients or does a poorer job of controlling unnecessary expenditures, the risk-adjustment program could easily become a tool for taxing private insurers to subsidize the government plan. • When estimating Medicare’s administrative costs, the federal government does not count the cost of activities undertaken by other federal agencies to support Medicare.79 If the government fails to include such costs when calculating the premiums for a new program, that would constitute an implicit subsidy and enable the new program to set its premiums below its true costs. To the extent that a new government program receives direct subsidies that are not available to private insurers, its relative cost would also be higher due to the deadweight loss of taxation, yet that added cost likewise would not appear in the government program’s premiums. Indirect Subsidies To subsidize a new government program, Congress need not hand it bags of cash or use creative accounting when setting premiums. Congress can instead subsidize its program indirectly, whether by granting it special status or increasing its competitors’ costs: • The taxpayer subsidies and other advantages granted to Medicare give the federal government a degree of market power that private insurers cannot match. That market power in turn creates opportunities for Congress to grant other special advantages to a new government program. Many supporters propose that a new program should adopt price controls identical or similar to Medicare’s, or that the federal government should require providers to participate in the new program as a condition of Medicare participation.80 Sen. Jay Rockefeller (D-WV) proposes to let a new program use Medicare’s price controls for two years, and to require doctors who participate in Medicare to participate in the new program for three years;81 yet those time frames could easily be extended to four years, six years, or beyond. Leveraging the special advantages granted to Medicare would enable a new government program to achieve a level of provider participation at a lower cost than private insurers. • Adopting Medicare-like price controls would also increase the prices that providers charge private insurers. Experts disagree about the exact mechanism that drives prices higher for private insurers.82 Whatever the case, such price controls would increase the cost of private insurance relative to a new government program. • Tightening the price controls that Medicaid uses to purchase prescription drugs, or expanding those price controls into either Medicare or a new government program, would likewise increase costs for the new program’s private competitors. The price controls that Congress imposes on drug purchases through the Medicaid program have the effect of increasing prices for private insurers by an estimated 15 percent.83 The Senate Finance Committee has suggested tightening this price control,84 while House Energy and Commerce Committee chairman Henry Waxman (D-CA) has proposed importing those price controls into Medicare.85 Either move would further increase costs for private insurers. • Any new program would come with an implicit guarantee that Congress would bail it out if premiums proved insufficient to cover its costs. Hacker argues for an explicit bailout guarantee when he writes that reserve requirements “would not make sense for the public health insurance plan,

which has the full faith and credit of the federal government behind it.”86 Even if the bailout guarantee were only implicit, that would enable the new program to set its premiums below costs. According to a 1996 Treasury Department report signed by Larry Summers, who is now President Obama’s National Economic Council chairman, a similar implicit guarantee saved Fannie Mae and Freddie Mac an estimated $6 billion per year. 87 Meanwhile, private insurers would effectively face higher reserve requirements than the government program. • Unlike many private insurers, government programs pay no taxes. The presence of corporate income taxes, investment taxes, etc., increases the price of private insurance relative to a government program. The CBO estimates that taxes account for 1.2 percent of private health insurance premiums, on average.88 Government could further advantage its program by raising taxes on private insurers, such as through the special tax on insurance-company profits proposed by Senator Schumer.89 • Government can increase the effective cost of private insurance by imposing penalties on consumers who choose it instead of the government plan. Federal regulations penalize seniors who opt out of Medicare to obtain private health insurance by taking away their Social Security benefits, past and future.90 That penalty exists in spite of a provision in the Medicare statute called, “Option to Individuals to Obtain Other Health Insurance Protection,” which reads: “Nothing contained in this title shall be construed to preclude . . . any individual from purchasing or otherwise securing, protection against the cost of any health services.”91 Even if Congress could create a new government program with no special advantages, a truly level playing field would require a credible guarantee that no future Congress and no future regulator would ever confer any special advantages on that program. Given the bailout craze of 2008–2009, it is not credible to suggest the government would not bail itself out if premiums were insufficient to support the new program’s outlays. That public perception would itself create an implicit bailout guarantee, and redound to the exclusive benefit of a new government program. Moreover, today’s Congress cannot bind future Congresses. Supporters of a new program know this, and they are already contemplating future efforts to secure special advantages for any new program that Congress creates.92 Medicare Advantage Medicare Advantage demonstrates that the playing field between a government program and private insurers could never be level. The Medicare Advantage program allows private insurers to compete with the traditional, government-run Medicare program. The playing field shifts depending on whether the party in power prefers government or private insurance. In 2003, President George W. Bush and a Republican Congress adopted fairly high price controls for the Medicare Advantage plans. More recently, a Democratic Congress has sought stricter price controls. President Obama even proposed to throw private plans out of Medicare entirely, which is not so much a level playing field as it is a cliff. Nichols and Bertko admit that the playing field isn’t level in Medicare Advantage due to congressional interference, and they claim that such interference is “not inherent in public-private competition.”93 Yet when Congress creates a federal health insurance program and a federal bureaucracy to craft and enforce the rules of competition between that program and private plans, nothing is more inherent to such a scheme than Congress and its whims.

If wise philosopher-kings could somehow create a new government health insurance program and (permanently) deny it of any special advantages, it would cease to be a government program. It would be just another private insurer. If that is what supporters of a new government program want, there is no need for Congress to act. Supporters can gather investors and launch their own private health plan right now. The only rationale for having Congress construct a new health plan is to create socially harmful competition whose objective is a government takeover of the U.S. health care sector.

Conclusion A new government program would supplant private insurance, despite offering inferior care at a higher cost. The program would attract consumers not by virtue of its superior performance, but by government’s ability to prevent the full cost of its program from appearing in enrollee premiums and its ability to increase the cost of private options. As the new program’s artificially low premiums crowd out private insurance, the government would exert even greater downward pressure on quality. Any new government health insurance program would shortly lead to a government takeover of health insurance markets— and the entire health care sector. No one should be surprised. President Obama has repeatedly affirmed his preference for a singlepayer, government-run health care system, such as exists in Canada.94 Many people, including New York Times columnist Paul Krugman, support a new government program precisely because they believe it will lead to a single-payer system.95 Hacker has quipped, “Someone once said to me, ‘This is a Trojan Horse for single-payer,’ and I said, ‘Well, it’s not a Trojan Horse—it’s right there! I’m telling you: we’re going to get there, over time, slowly.’”96 If Congress wants to make health care more efficient and increase competition in health insurance markets, there are far better options. Congress should let consumers—rather than employers or the government—control their health care dollars and choose their health plan. It should convert Medicare into a program that gives seniors a voucher and frees them to purchase any health plan on the market.97 Reforming the tax treatment of employer-sponsored insurance with “large” health savings accounts would give workers the thousands of dollars of their earnings that employers currently control, and likewise free workers to purchase any health plan on the market.98 Finally, Congress should expand competition by prohibiting states from denying market entry to health plans and providers licensed by other states—that is, by making clinician and health-insurance licenses portable across state lines.99 Those reforms would reduce costs, increase innovation, and reduce the number of uninsured— without higher taxes or additional government spending. Congress should reject proposals to create a new government health insurance program— not for the sake of private insurers, who would be subject to unfair competition, but for the sake of American patients, who would be subject to unnecessary morbidity and mortality.

22. Kaiser Family Foundation, “ Medicare Fact Sheet: Medicare Advantage,” April 2009, http://www.kff.org/medicare/upload/205212.pdf. 23. President-elect Obama opined, “ We’ve got to eliminate programs that don’t work, and I’ll give you an example in the health care area. We are spending a lot of money subsidizing the insurance companies around something called Medicare Advantage, a programthat gives themsubsidies to accept Medicare recipients but doesn’t necessarily make people on Medicare healthier. And if we eliminate that and other programs, we can potentially save $200 billion out of the health care systemthat we’re currently spending, and take that money and use it in ways that are actually going to make people healthier and improve quality. So what our challenge is going to be is identifying what works and putting more money into that, eliminating things that don’t work, and making things that we have more efficient.” ABC News, This W eek with George Stephanopolous, January 12, 2009, http://media.bulletinnews.com/playclip.aspx?clipid=8cb4275f6a44ad3. 24. Joe Klein, “ The Fire This Time: Is This Health Care’s Moment?” Time Magazine, May 7, 2009, http://www.time.com/time/politics/article/0,8599,1896574,00.html. 25. Congressional Budget Office, “ Key Issues in Analyzing Major Health Insurance Proposals,” December 2008, p. 69, http://www.cbo.gov/ftpdocs/99xx/doc9924/12-18-KeyIssues.pdf. 26. If profits fail to serve that purpose in private health insurance markets, the reason may be that government gives employers control over 70 percent of all spending on private health insurance, which forces insurers to respond to the needs of employers more than consumers. U.S. Centers for Medicare & Medicaid Services, “ Sponsors of Health Care Costs: Businesses, Households, and Governments, 1987–2007,” http://www.cms.hhs.gov/NationalHealthExpendData/downloads/bhg07.pdf; and author’s calculations. 27. Congressional Budget Office, “ Key Issues,” p. 93, http://www.cbo.gov/ftpdocs/99xx/doc9924/12-18-KeyIssues.pdf. Emphasis added. 28. Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2009, p. 12, http://medpac.gov/documents/Mar09_EntireReport.pdf. 29. Lewis Morris (testimony before Senate Finance Committee, U.S. Department of Health and Human Services, Office of the Inspector General, April 21, 2009, p. 2), http://finance.senate.gov/hearings/testimony/2009test/042109lmtest.pdf. 30. The Department of Health and Human Services’ Office of the Inspector General estimates that every $1 it spends on Medicare audits saves taxpayers $17. Morris, p. 1, http://finance.senategov/hearings/testimony/2009test/042109lmtest.pdf. A rational health care purchaser would keep increasing such audits until $1 of oversight yielded exactly $1 of savings—in economic jargon, the marginal return would be $1. Unfortunately, the OIG does not calculate the marginal return on investment for Medicare audits. Donald B. White, Department of Health and Human Services’ Office of the Inspector General, Public Affairs, e-mail message to author, July 9, 2009. However, the average return on investment is not only high, but has been steadily rising in recent years. U.S. Department of Health and Human Services, Office of the Inspector General, “ FY 2010 Online Performance Appendix,” http://www.oig.hhs.gov/publications/docs/budget/FY2010_online_performance_appendix.pdf. At a minimum, that raises the question of whether Medicare underinvests in claims auditing. 31. On the vices of government health insurance programs, see generally, David A. Hyman, Medicare Meets Mephistopheles (Washington: Cato Institute, 2006). 32. Shannon Brownlee and Ezekiel Emanuel, “ 5 Myths about Our Ailing Health Care System,” W ashington Post , November 23, 2008, http://www.washingtonpost.com/wp-dyn/content/article/2008/11/20/AR2008112002420.html. 33. Congressional Budget Office, “ Key Issues,” pp. 69–70, http://www.cbo.gov/ftpdocs/99xx/doc9924/12-18-KeyIssues.pdf. 34. Hacker is a notable exception. See Hacker, “ The Case for Public Plan Choice,” p. 6, http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf. 35. Mark E. Litow, “ Medicare versus Private Health Insurance: The Cost of Administration,” Milliman, January 6, 2006, p. 4, http://www.cahi.org/cahi_contents/resources/pdf/CAHIMedicareTechnicalPaper.pdf. 36. Martin Feldstein, “ How Big Should Government Be?” National Tax Journal 50, no. 2 (June 1997): 197, http://ntj.tax.org/wwtax%5Cntjrec.nsf/36CFE3E5BCCB188C85256863004A5939/$FILE/v50n2197.pdf. 37. Hacker, “ The Case for Public Plan Choice,” p. 6, http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf.

69. Blue Dog Coalition, “ Health Care Reform: Ensuring Choice in the Marketplace,” June 4, 2009, http://www.house.gov/melancon/BlueDogs/Press%20Releases/Health%20Care%20Reform%20%20Ensuring%20Choice%20in%20the%20M 70. Len M. Nichols and John M. Bertko, “ A Modest Proposal for a Competing Public Health Plan,” New America Foundation, March 2009, http://www.newamerica.net/files/CompetingPublicHealthPlan.pdf. 71. “ With a history of operating losses, Amtrak is highly dependent on federal government subsidies to sustain its operations.” Government Accountability Office, “ Activities of the Amtrak Inspector General” (letter to the Honorable John F. Tierney, U.S. House of Representatives, March 4, 2005), http://www.gao.gov/new.items/d05306r.pdf. See also Michael W. Lynch, “ Amtrak Accounting,” Reason , May 2000, http://www.reason.com/news/show/27688.html. 72. Robert R. Schrum, “ Don’t Bail out the Mail,” Forbes , January 19, 2009, http://www.forbes.com/2009/01/19/usps-privatizepostal-oped-cx_rs_0119schrum.html. 73. Robert R. Schrum, “ Postal Service Fails to Deliver for Consumers,” The Virginian-Pilot , March 30, 2009, http://lexingtoninstitute.org/1390.shtml. 74. Scott Harrington, “ Public Plan Option: Competitor or Predator?” (presentation at an American Enterprise Institute event, “ The

Obamacare’s number-one idea for improving health care quality and reducing costs is to promote something called “accountable care organizations” in Medicare. That effort is sinking like a stone, because it—like the rest of this sweeping law—is premised on the fatal conceit that government experts can direct the market better than millions of consumers making their own decisions. “Accountable care organizations” is jargon for the radical concept that when doctors and nurses actually talk to each other about shared patients, there will be fewer mix-ups, less duplication and patients will receive better, more convenient care at a lower cost. Markets created the first ACOs, including Kaiser Permanente, more than six decades ago. The federal government, in contrast, has long tried to ensure that nothing so sensible ever happens. For nearly five decades, Medicare regulations have financially penalized doctors who coordinate care. The Medicare Payment Advisory Commission reports that Medicare regulations are “largely neutral or negative towards quality” and sometimes pay providers “even more when quality is worse,” like when poor coordination injures Medicare patients. Obamacare supporters say the solution to this failure of centralized economic planning is . . . more centralized economic planning. The law therefore authorizes Medicare to encourage care-coordinating ACOs. Medicare’s idea of encouragement is this: If doctors and hospitals invest substantial resources to form an ACO, and better care coordination reduces the amount they bill Medicare, then the ACO will get to keep part of the savings. “Here’s a flash for the policy wonks pushing ACOs,” writes industry expert Robert Laszewski. “They only work if the provider gets paid less for the same patient population. Why would they be dumb enough to voluntarily accept that outcome?” The Mayo Clinic, the Cleveland Clinic and 93 percent of multi-specialty physician groups are not that dumb. In what the Associated Press called an “unusual rebuke,” they and other providers that President Obama has hailed as models for his ACO program have refused to participate in it. Many of the recalcitrant providers gladly participated in a similar program launched by the Bush administration, and this week we learned why: that program failed to produce any significant savings for taxpayers. They now want Obama’s ACO program to cough up more money before they will participate. How much more? A survey of Swiss doctors is not encouraging. It found “general practitioners will require a pay increase of up to 40 percent before they are willing to accept coordinated care.” Hospitals claim their start-up costs would be ten times higher than Medicare bureaucrats estimate. A frantic Obama administration took less than a week to capitulate. It told providers like the Mayo Clinic, in effect, “Name your price.” It is also “considering” whether other ACOs “could receive an

advance on the shared savings they are expected to earn.” The administration promises to recoup those up-front subsidies, you know, later. When purchasing health care, the government should do what it can to improve quality while reducing costs. But this latest debacle once again demonstrates that for all its immense purchasing power, Medicare is paradoxically powerless to do so. Why? Because greater efficiency necessarily means that low-quality/high-cost providers will get less money, and those providers all hire lobbyists to protect their Medicare subsidies. Inefficient providers have effectively killed nearly every pilot program that previous administrations promised would make Medicare more efficient. Suppliers of wheelchairs and other medical equipment have blocked efforts to reduce the inflated prices Medicare pays them. The industry has killed or sabotaged at least four federal agencies dedicated to researching which medical treatments don’t work. Obamacare’s new comparative-effectiveness agency, countless pilot programs and even its “Independent Payment Advisory Board”—a rationing board supposedly insulated from the influence of industry lobbyists—will suffer the same fate. The only way to improve quality while reducing costs is to give patients the incentive and the power to say “no” to inefficient providers. The Medicare reforms that passed the House don’t go as far as they should, but they are a good start. For one thing, they would do a better job of promoting ACOs. The House reforms build on Medicare Advantage, which already gives one fifth of Medicare enrollees the freedom to choose their own health plan. Kaiser Permanente CEO George Halvorson says the new law’s ACO program “is not as good as” Medicare Advantage when it comes to promoting accountable care. And he should know something about that. This article appeared on KaiserHealthNews.org on June 3, 2011.

Chapter 41

Oregon’s Verdict on Medicaid by Michael F. Cannon

Americans may be surprised to learn that little solid evidence exists to support the claim that expanding health insurance will improve the health and financial security of the uninsured; that some research calls into question whether broad coverage expansions improve health at all; and that some research even suggests that the overall benefits of such expansions may not be worth the cost. We lack definitive evidence because no developed nation has ever conducted a study that randomly assigns people to receive health insurance in order to control for other factors that might affect these outcomes. Until now. In 2008, Oregon decided to enroll an additional 10,000 people in its Medicaid program via lottery. The nation’s top health economists pounced on the opportunity to compare medical consumption, health outcomes, and financial stress among “able-bodied uninsured adults below 100 percent of [the] poverty [line],” some of whom were randomly assigned to Medicaid and some of whom were not. The Oregon Health Insurance Experiment is particularly relevant because, starting in 2014, President Obama’s new health-care law will enroll another 16 to 20 million such people in Medicaid. Today, the OHIE researchers released their results after year one of the experiment. As one might expect, Medicaid coverage led to higher medical consumption. The likelihood of having a hospital admission rose from roughly 7 percent to 9 percent. Average outpatient visits rose from 1.9 to 3. Mammograms for women over age 40 increased from 30 percent to 49 percent, and diabetes screening increased from 60 percent to 69 percent. Average spending was about 25 percent (or $778) higher for Medicaid enrollees in the first year. Other findings were less intuitive. For example, medical consumption was no higher in the first half of the year, suggesting there was no “pent-up demand” for medical care. Though President Obama has claimed that broader health-insurance coverage and consumption of preventive care would lead to a reduction in emergency-room visits, the OHIE found no discernible difference in ER use between Medicaid enrollees and the control group. What benefits did all this medical care purchase? As one might have expected, Medicaid reduced financial strain. The likelihood of having out-of-pocket medical expenses fell from 56 percent to 36 percent, while the likelihood of having to borrow money or skip paying other bills to pay for medical care fell from 36 percent to 21 percent. Enrollees’ likelihood of having any type of unpaid bill sent to collection fell from 50 percent to 45 percent. What about health? Though the president has claimed his health-care law will “save lives,” the OHIE detected no evidence that extending Medicaid to 10,000 adults did so in the first year. On one hand, we might not expect to see any effect just one year into the experiment, since mortality rates among adults aged 19 to 64 are relatively low. On the other hand, this finding is consistent with a previous study, coauthored by one of the OHIE researchers, that found no evidence that Medicare (which covers a much

older and sicker population) saved any lives even ten years after its introduction. (In future years, OHIE researchers will be able to report on other objective measures of health such as blood pressure and cholesterol levels.) On subjective measures of health, the likelihood of screening positive for depression fell from 33 percent to 25 percent, and the share reporting their health to be good or better rose from 55 percent to 68 percent. However, two-thirds of the improvement in self-reported health occurred almost immediately after enrollment, before any increases in medical consumption. The authors posit that much of this improvement could reflect “an improved overall sense of well-being” rather than “changes in objective physical health.” Supporters of President Obama’s health-care law may tout these benefits, but the OHIE does not provide the vindication they seek. First, despite being eligible for Medicaid, 13 percent of the control group had private health insurance—suggesting that on some dimension, Medicaid’s eligibility rules are already too broad. Second, the OHIE extended coverage to the most vulnerable population of uninsured Americans, yet the improvements in health and financial security are so far apparently modest. At higher income levels, where individuals have greater baseline access to health insurance and medical care, the benefits of expanding coverage are likely to be smaller and the costs (to the extent that crowd-out is higher at higher income levels) will be greater. Third, supporters must show not only that expanding coverage improves health but also that it does so at a lower cost to taxpayers than alternative policies. Health economists generally agree that discrete programs promoting highly effective treatments (for hypertension, diabetes, etc.) could produce health gains as large as expanding health insurance would, but at far less expense. Reducing taxes could plausibly reduce financial strain to a similar degree by expanding job creation. Finally, the OHIE illuminates an unflattering feature of the push for Obamacare. For a century, the Left has advocated universal health insurance despite not knowing what benefits it might bring. In 2010, Congress and President Obama vastly expanded Medicaid without waiting for the results of the one study that might tell them what taxpayers would get in return for their half a trillion dollars. As the law’s supporters seek to cajole doctors into practicing evidence-based medicine, it is no small irony that they themselves dove head-first into evidence-free policymaking. This article appeared on National Review (Online) on July 7, 2011.

Chapter 42

The CLASS Act: This is Confidence-Inspiring? by Michael F. Cannon

The Obama administration has officially scrapped one of the two entitlement programs Congress created under Obamacare. The failure of the “CLASS Act” shows how the rest of that law threatens every American’s private health insurance. The idea behind CLASS was that the government would run a voluntary and self-sustaining insurance plan to help the disabled pay for long-term care, including nursing home care. It was doomed to fail, thanks to a special kind of government price control Congress imposed on the premiums. Congress required CLASS to set each applicant’s premiums according to the average applicant’s risk of needing such long-term care, rather than her individual risk. But averaged premiums are only attractive to people with above-average risks. Since few people with below-average risks would enroll, the average premium would rise. That would encourage more people with below-average risks not to enroll, and the vicious cycle would continue until the program collapsed. As it turns out, CLASS collapsed even before its 2012 start date. The same thing happened when Obamacare imposed the same sort of price controls on health insurance for children in September 2010: the markets for child-only coverage collapsed in a total of 17 states, and are slowly collapsing in even more. Everyone with a rudimentary understanding of insurance saw this coming. The government’s nonpartisan actuaries warned of “a very serious risk” that CLASS would be “unsustainable.” One wrote, “Thirty-six years of actuarial experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue.” The Democratic chairman of the Senate Budget Committee called CLASS “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” An Obama administration official wrote, “Seems like a disaster to me.” One of President Obama’s own cabinet secretaries called the program “totally unsustainable” and echoed a presidential commission on fiscal responsibility by recommending it be “reformed or repealed.” In the face of this setback, Obamacare supporters are naturally declaring victory. Jonathan Cohn of The New Republic sees “vindication.” Kevin Drum of Mother Jones proudly announces, “What happened here is that government worked exactly the way it ought to.” The Washington Post’s Ezra Klein instructs, “The CLASS experience should, if anything, make us more confident in the underlying law.” It’s hard to argue with such logic, but let’s try. Cohn agrees with government actuaries that voluntary, self-sustaining insurance plans “face a significant risk of failure” when government imposes these price controls. Yet he claims the CLASS Act’s failure “strengthens the case” for the rest of the law because when Obamacare imposes those price controls on everyone’s health insurance in 2014, it will also force low-risk people to buy that overpriced health insurance. It is a virtue, he argues, that Obamacare forces people to take what they consider a bad

deal. The law also tries to prevent the market from unraveling by using roughly half a trillion dollars of new tax revenue to subsidize people’s premiums. It is a virtue, say supporters, that Obamacare raises taxes (amid high unemployment, no less) to encourage people to buy something they would not voluntarily purchase with their own money. Obamacare inspires confidence in its supporters, then, because one part of the law throws a Hail Mary pass to prevent another part of the law from stripping Americans of the insurance that currently protects them from illness and impoverishment. Feel safer? One of the law’s biggest supporters offers reason to think the Hail Mary strategy won’t work. MIT economist Jonathan Gruber projects the law will increase net premiums for six out of 10 people in Wisconsin’s individual market by an average of 31 percent. (A study of Obamacare’s impact on Ohio projected much larger premium increases for many individuals and businesses.) That is, low-risk people will still have plenty of reason to walk away. And insofar as the Hail Mary succeeds in delaying collapse, the growth in health insurance premiums will accelerate. Klein writes, “One way of looking at the administration’s [CLASS] decision is that it shows a commitment to fiscal responsibility.” If so, then let’s handle the rest of Obamacare exactly the same way. Congress should require Obamacare’s health insurance provisions to be voluntary and selfsustaining, just like CLASS: no individual mandate, no taxpayer subsidies. Or is fiscal irresponsibility part of the plan? This article appeared on The Daily Caller on October 21, 2011.

Introduction Decades of centralized economic planning, through the federal Medicare program and other government interventions, have led to excessive health care spending in the United States and suppressed the quality of medical care.1 For example, Congress has proven incapable of containing wasteful Medicare spending. Medicare purchases medical care on behalf of 46 million elderly and disabled U.S. residents2 and is placing enormous strain on the federal budget.3 Annual Medicare spending is currently $555 billion,4 and the best evidence suggests that one-third of Medicare spending is pure waste.5 Yet Medicare spending per enrollee typically grows at an unsustainable 2.5 percentage points faster than U.S. gross domestic product (GDP), to say nothing of growth in enrollment.6 Even Medicare’s defenders acknowledge it penalizes high-quality care and encourages low-quality care. Peter Orszag, former director of the federal Office of Management and Budget under President Barack Obama, notes that Medicare literally encourages unnecessary hospital readmissions by penalizing hospitals if they deliver high-quality care that reduces readmissions: Reimbursement from Medicare is still primarily based on how many services hospitals perform rather than on how well they care for patients, so hospitals are often financially penalized for improving value and quality. The Mount Sinai [Medical Center] program to reduce readmissions, for example, is costly for the hospital both because of the extra expense of running it and because fewer readmissions means less revenue. Ken Davis, the president and chief executive officer of Mount Sinai, says the hospital won’t be able to afford continuing the successful program if [Medicare’s] financial incentives remain so skewed against it.7 As the largest purchaser of medical care in the nation, Medicare’s perverse incentives shape the delivery of care to all Americans, even those with private health insurance. These and other government failures seem impervious to reform. Medicare spending grows uncontrollably because, as one journalist puts it, “Congress has a record of ignoring or voting down many proposals to save money in Medicare.”8 According to Orszag and many other defenders of governmentrun health care, the fault is not in government itself, but in the fact that government is too accountable to the people.9 The problem is not government, but democratic government.

“Enter the Platonic Guardians”10 In March 2010, Congress and President Obama enacted the Patient Protection and Affordable Care Act (PPACA, or “the Act”), which attempts to sidestep the obstacles the U.S. Constitution puts in the way of government officials seeking to direct the economy’s health care sector. The Act authorizes approximately $1 trillion of new federal entitlement spending. Congress financed roughly half of this new spending through provisions designed to reduce the projected growth in Medicare spending, including cuts in payments to health care providers that serve Medicare enrollees. Since Congress frequently rescinds such cuts under political pressure from providers and Medicare enrollees, Obama, Orszag, and others prevailed on Congress to create a new government agency called the Independent Payment Advisory Board, or IPAB. The Act authorizes IPAB to cut Medicare payments even further than PPACA itself does. More importantly, Congress designed IPAB so that its decisions would automatically take effect, even in the face of popular resistance that would prevent Congress itself from enacting the same measures. Orszag describes IPAB as an attempt “to take some of the politics out” of government direction of the health care sector.11 Instead, IPAB is an admission that government has badly mismanaged health care. It’s also an effort to solve that problem by giving unfettered power to unelected government officials. The Act literally bypasses the constitutionally prescribed manner by which proposed legislation becomes law, the separation of powers between the executive and legislative branches, and the related checks and balances between those branches. The Act empowers IPAB’s unelected government officials to propose legislation that can become law without congressional action, meaningful congressional oversight, and without being subject to a presidential veto, administrative review, or judicial review. The Act even attempts to prevent future Congresses from repealing IPAB. The Independent Payment Advisory Board is worse than unconstitutional—it is anti-constitutional. Congress’s legislative powers do not include the power to alter the constitutional procedure required for the passage of laws. Nor does it include the power to entrench legislation by preventing it from being altered by future Congresses.

IPAB’s Structure When fully empanelled, IPAB will consist of 15 voting members appointed by the president and confirmed by the Senate.12 Board members may nominally serve up to two consecutive six-year terms. If a board member reaches the end of his term and the president declines to appoint (or the Senate fails to confirm) a successor, however, he may serve indefinitely. 13 Board members will be executive-branch employees, with each earning upward of $165,000 per year. 14 PPACA automatically funds IPAB in perpetuity, with an initial budget of $15 million.15 PPACA does not require the board to be bipartisan, as is required for most other independent agencies.16 The president could therefore use his power to make recess appointments to stack the board entirely with members of his own party. 17 If recent history is any guide, the president could even make “recess” appointments while the Senate is not in recess.18

An Economic Dictator In some circumstances, PPACA vests IPAB’s vast powers in the hands of just a few unelected government officials. Though the Act allows as many as 15 voting board members, the board may conduct business whenever half of its appointed members are present, and may act upon a majority vote by all members present.19 When there are no vacancies, therefore, the board will reach a quorum whenever as few as eight members gather, and any five members could wield IPAB’s considerable powers. When vacancies do exist—before the president and the Senate put the initial 15 members in place, or when board members resign or die in office—an even smaller cadre of unelected officials could wield the full range of the board’s powers. In some cases, PPACA vests IPAB’s powers in just one individual. If there are 14 vacancies on the board, the Act allows the sole appointed member to constitute a quorum, conduct official business, and issue “proposals.” The greater danger, then, is not that a president might pack the board with multiple party loyalists, but that he might appoint only one. Or none: if the president fails to appoint any board members (or the Senate fails to confirm the president’s appointments, or a majority of the board cannot agree a proposal) the Act authorizes the Secretary of Health and Human Services to exercise the board’s powers unilaterally. These powers include the ability to appropriate funds to her own department to administer her own directives (see Box 1).

IPAB’s Mission IPAB’s stated mission is to prevent per-enrollee Medicare spending from growing faster than a specified target rate. Through 2017, that rate will be the average of medical inflation and overall inflation. Beginning in 2018, it will be the rate of growth of the economy per capita plus one percentage point.

1. IPAB Gives HHS the Power of the Purse In certain circumstances, PPACA grants the Secretary of Health and Human Services the power to appropriate funds to that department, and empowers either the president or a minority of the Senate to trigger that grant of power. The Act requires that every IPAB proposal “shall include recommendations with respect to administrative funding for the Secretary to carry out the recommendations contained in the proposal,” and “shall include . . . a legislative proposal that implements the recommendations.”20 Absent congressional action, that “legislative proposal” becomes law. The act then transfers that appropriations power to the Secretary under certain circumstances: If . . . the Board is required, but fails, to submit a proposal to Congress and the President by the deadline . . . the Secretary shall develop a detailed and specific proposal that satisfies the requirements of subparagraphs (A) [i.e., the power to appropriate funds to the Secretary] . . . and contains the information required paragraph (3)(B) [including the “legislative proposal that implements” those appropriations]).21 As noted nearby, the president could give the Secretary that power simply by refusing to appoint any

IPAB members. A minority of the U.S. Senate could also do so by refusing to end debate on the confirmation of IPAB nominees. Whenever the federal government projects that per-enrollee spending in traditional Medicare (Parts A, B, and D) will grow faster than that target growth rate, IPAB must make, by January 15 of the preceding year, a “detailed and specific” “legislative proposal” that is “related to the Medicare program.”22 The Act requires the board to issue a “proposal” every year with only two exceptions: (1) when projected Medicare spending is less than its target growth rate, or (2) when medical inflation is less than overall inflation.23 The Act requires that those proposals “shall . . . result in a net reduction in total Medicare program spending . . . that is at least equal to the applicable savings target.”24 The savings target is generally 1.5 percent of total Medicare spending, but this is a minimum. The Board may “propose” even greater reductions in projected Medicare expenditures.25 If historical trends persist, IPAB will likely issue a proposal every year. Per-enrollee Medicare spending has historically grown an average of 2.6 percentage points faster than per capita GDP. 26 The Obama administration claims IPAB might not issue any proposals at all, because the Congressional Budget Office projects that “the rate of growth in Medicare spending per beneficiary [will] remain below the levels at which the IPAB will be required to intervene to reduce Medicare spending” through 2021. 27 Nevertheless, Congress appropriated $15 million per year for IPAB in perpetuity, reflecting Congress’ presumption that IPAB will act; the relevant projections will change from year to year; and those projections rest on the dishonest accounting required by the Act. 28 Moreover, the Congressional Budget Office projects that IPAB will begin issuing proposals after 2021. 29 Supporters further claim that IPAB may not issue a single proposal, because the mere threat of IPAB acting could motivate Congress to restrain Medicare spending. However, as we explain below, the Constitution does not grant Congress either the authority to endow an agency with IPAB’s vast lawmaking powers, or the authority to bind future Congresses. Both components of this strategy—creating IPAB, and using it to force future Congresses to act—are therefore unconstitutional. The Constitution is not a hostage that one Congress can threaten to shoot in order to control the behavior of future Congresses.

health care, raising certain Medicare revenues, increasing Medicare beneficiary cost sharing, restricting Medicare benefits, or modifying Medicare eligibility criteria.31 These restrictions, however, are not what they seem. First, by carving out a discrete list of limitations on the board’s delegated powers, the Act implicitly gives IPAB otherwise unlimited power to exercise any enumerated congressional power with respect to any governmental body, industry, property, product, person, service, or activity. Aside from these limitations, nothing in the Act prevents IPAB from proposing any kind or magnitude of regulation or tax that is within the power of Congress to enact (see Box 2). Nor does PPACA preclude IPAB from proposing the appropriation of federal funds or the imposition of conditions on the receipt of such funds. The Board could propose, for instance, to require states to implement federal laws or to enact new state laws in order to receive federal funding. The Board need only demonstrate that its proposals and recommendations relate to Medicare in some undefined way.32 Second, the explicit restrictions that PPACA imposes on IPAB’s proposals are illusory. For example, while the Act prohibits IPAB from rationing care, the Act does not define rationing. It instead leaves that task to IPAB and the Secretary of Health and Human Services and shields their definition from any meaningful review (see below). If IPAB and the Secretary adopt a narrow definition of rationing—say, that rationing only occurs when Medicare flatly refuses to pay for a given service—then IPAB could deny access to care as it sees fit simply by setting Medicare’s prices for certain treatments and procedures so low that no providers will offer them. This is hardly an abstraction. Under current law, by the end of the century Medicare’s prices for hospital and physician services will fall from roughly 66 percent and 80 percent of what private insurers pay (respectively) to roughly one-third of what private insurers pay. 33 These current-law price controls could result in “a serious decline in the availability and/or quality of health services for Medicare beneficiaries,” according to Medicare’s actuaries. 34 As many as 15 percent of hospitals “might end their participation in the program” before the end of the decade.35 (For further discussion, see Box 2.) As discussed below, IPAB can impose such rationing measures even when Congress would not approve them and would otherwise rescind them.

IPAB’s Scope The Independent Payment Advisory Board’s defenders typically speak of the Board as if it will only affect the Medicare program.39 On the contrary, IPAB will have the power to ration or reorganize care even for those who are not enrolled in government programs. The Act grants IPAB the power to regulate non-federal health care programs and private health care and health insurance markets, so long as such action is “related to the Medicare program,” “improv[es] health care outcomes,” and serves IPAB’s other stated goals.40 IPAB’s ability to regulate private health care markets comes from the sweeping powers discussed above. Numerous provisions of the Act show this was also the clear intent of IPAB’s architects.

The answer is yes. PPACA states that IPAB’s proposals “shall not include any recommendation to ration health care, raise revenues or Medicare beneficiary premiums under section 1818, 1818A, or 1839, increase Medicare beneficiary cost-sharing (including deductibles, coinsurance, and copayments), or otherwise restrict benefits or modify eligibility criteria.”36 Rather than a flat prohibition on raising revenue, this restriction appears only to prevent IPAB from proposing to increase revenues under those specific sections of the Social Security Act, which cover premium revenue under Medicare Parts A and B. Even if IPAB were subject to judicial review, federal courts likely would defer to IPAB’s and the Secretary’s permissive interpretation of that language. 37 But PPACA specifically states that the Secretary’s implementation of IPAB’s proposals is not judicially reviewable. Yet assume, for the sake of argument, that this language does prohibit IPAB from proposing higher Medicare premiums, or an increase in the Medicare payroll tax, or a tax on Medicare-participating providers (on the theory that it would reduce Medicare spending), or any other tax. What if IPAB proposed one of these revenue enhancements anyway? What would stop it from becoming law? Put differently, is there an enforcement mechanism behind PPACA’s prohibition on such proposals? There is not. The Act exempts the Secretary’s implementation of IPAB proposals from administrative and judicial review, so no one could sue to block it. The president could not shelve it, because IPAB submits its proposals directly to Congress. If the Secretary submits a proposal in IPAB’s stead, PPACA requires the president to submit the proposal directly to Congress. The Act allows Congress and the president to block that tax increase by offering a substitute or by mustering a three-fifths majority in the Senate— but that merely shows that IPAB’s tax increases and spending cuts are on an equal footing.38 If Congress and the president fail to reject IPAB’s tax increase or to enact on a substitute, the Act requires the Secretary to implement it, with the help of funds that IPAB may itself appropriate. Indeed, to enforce PPACA’s prohibition on IPAB increasing taxes, the president or Congress would have to violate PPACA. If the president refused to submit IPAB’s tax increase to Congress, or Congress and the president enacted a law with less than a three-fifths majority in the Senate that simply blocked the tax increase, or if a federal court chose to review the tax increase and struck it down, or if the Secretary chose (possibly at the president’s direction) not to implement it, then those government officials would be violating the law by ignoring the various statutory rules protecting IPAB’s proposals. Consider another implication of the potential claim that federal officials can ignore the rules protecting IPAB proposals whenever they determine, in their judgment, that IPAB has violated limitations on its own powers. If that were true, then those officials could also block each and every IPAB proposal merely by declaring that, in their judgment, the proposal achieves savings by limiting Medicare enrollees’ access to care, and therefore violates the prohibition on IPAB rationing care. If Congress and the courts can block an IPAB tax, in other words, then they can block any IPAB proposal. That is inconsistent with the clear meaning and intent of IPAB’s authorizing statute. IPAB can raise taxes as surely as it can alter Medicare payments. The Act creates an unaccountable lawmaking body, and leaves elected officials with little to stop it. First, IPAB has a statutory obligation to “coordinate” its proposals and recommendations with

studies of private markets and non-federal delivery systems.41 For example, the Act requires IPAB to produce a “public report” containing “standardized information on system-wide health care costs, patient access to care, utilization, and quality-of-care that allows for comparison by region, types of services, types of providers, and both private payers and the program under this title.”42 The Act requires IPAB to include in its reports “[a]ny other areas that the Board determines affect overall spending and quality of care in the private sector.”43 The Act then requires IPAB to rely on these reports when formulating its proposals.44 Second, PPACA requires IPAB to submit to Congress and the president recommendations to “slow the growth in national health expenditures” and “Non-Federal Health Care Programs.”45 These include recommendations that may “require legislation to be enacted by Congress in order to be implemented” or that may “require legislation to be enacted by State or local governments in order to be implemented.”46 Third, PPACA presumes that IPAB’s proposals will include areas of the health care sector that lie beyond the Senate Finance Committee’s jurisdiction, which encompasses Medicare, Medicaid, the State Children’s Health Insurance Program, and even the tax treatment of private health insurance and medical expenses. The Act alters Senate rules so that, when considering an IPAB legislative proposal, the Senate Finance Committee may approve legislative matters outside the committee’s jurisdiction “if that matter is relevant” to an IPAB proposal. 47 If the requirement that IPAB proposals be related to the Medicare program meant that they would be confined to the Medicare program or even confined to the Finance Committee’s jurisdiction, then it would be unnecessary to alter this Senate rule. This language instead indicates IPAB’s proposals will affect matters outside of Medicare, and even outside the Finance Committee’s expansive jurisdiction. Fourth and most importantly, the Act provides that if the Medicare actuaries project that the growth rate of national health expenditures will exceed that of per-enrollee Medicare spending, IPAB’s “proposal shall be designed to help reduce the growth rate [of national health expenditures] while maintaining or enhancing beneficiary access to quality care under [Medicare].”48 This is a clear mandate to reduce both government and private-sector health care spending. Indeed, the simplest way to reduce overall health care spending while maintaining access to care for Medicare enrollees is to limit spending on patients outside of Medicare. PPACA’s authors had originally named IPAB the Independent Medicare Advisory Board. The reconciliation bill that amended PPACA changed the name to the Independent Payment Advisory Board, suggesting the law’s authors made a deliberate choice to grant IPAB the power to regulate beyond Medicare.49 Timothy Jost, a leading expert on and defender of PPACA, has written that it may not be possible to curb Medicare expenditures without addressing private expenditures, and that the board is likely to end up setting prices for all medical services.50

A New Legislative Process IPAB’s proposals are not mere proposals. Orszag, who is perhaps the foremost advocate of IPAB, explains that the Act vests IPAB with “an enormous amount of potential power” 51 —in effect, the unilateral power to make law:

President Obama fought hard for IPAB, over strong opposition from Congress, which saw the board as usurping its power. When IPAB starts up in 2014, it will comprise an independent panel of medical experts charged with devising changes to Medicare’s payment system. In each year that Medicare’s per capita costs exceed a certain threshold, IPAB will be responsible for making proposals to reduce this projected cost growth to the specified threshold. The policies will then take effect automatically unless Congress specifically passes legislation blocking them and the president signs that legislation. In other words, the default is that [IPAB’s] policies . . . will take effect.52 Orszag notes that thanks to IPAB, “the default is now switched in a very important way.”53 The default has indeed shifted so significantly that it is misleading to call IPAB’s edicts “proposals.” IPAB’s proposals will have force of law. The reasons for this are twofold. First, PPACA requires the Secretary of Health and Human Services to implement them. Second, it severely restricts Congress’ ability to block their implementation by rejecting them or offering a substitute proposal. These provisions will effectively make IPAB’s proposals law without the approval of Congress or the signature of the president.54 Lack of Checks and Balances Anticipating that voters would resist having 15 unelected officials ration care to 300 million Americans, PPACA’s authors included several provisions designed to prevent future Congresses, presidents, and courts from blocking IPAB’s proposals. These provisions have the effect of insulating IPAB from any meaningful accountability to the people whose lives its decisions will affect. First, PPACA exempts the development of the board’s proposals from the administrative rulemaking requirements that Congress imposes on other executive-branch agencies.55 Such requirements are essential to representative government because they are the only way the public can provide input, data, and analysis on whether an agency should reject, approve, or modify a proposed regulation. Congress passed the Administrative Procedures Act for this very purpose. 56 However, PPACA does not require IPAB to hold hearings, take testimony, or receive evidence from the public.57 Second, PPACA authorizes IPAB to submit its proposals directly to Congress in a “legislative proposal.” When the Secretary develops a proposal in IPAB’s stead, PPACA states the president “shall within 2 days submit such proposal to Congress.”58 This requirement restricts the president’s authority under the Constitution’s Recommendations Clause, which states the president may “recommend to [Congress’s] Consideration such Measures as he shall judge necessary and expedient.”59 For example, in 2009, President Obama invoked the Recommendations Clause with regard to provisions of the Omnibus Appropriations Act: Several provisions of the Act . . . effectively purport to require me and other executive officers to submit budget requests to Congress in particular forms. Because the Constitution gives the President the discretion to recommend only ‘such Measures as he shall judge necessary and expedient’ . . . I shall treat these directions as precatory.60 PPACA unconstitutionally attempts to deny the president his constitutional prerogative to use his own

discretion as to what measures he submits to Congress. Third, once a legislative proposal arrives in Congress, the Act protects it by codifying changes to the Senate’s parliamentary rules that limit the ability of the Senate—and thereby the House of Representatives, which must reach agreement with the Senate—to modify or reject the proposal before it automatically becomes law. These statutorily entrenched parliamentary rules include, but are not limited to, the following: • The Act imposes parliamentary rules that limit each chamber’s ability to make any changes to a legislative proposal that would result in greater Medicare spending.61 To prevent an IPAB proposal from becoming law, then, Congress must offer a substitute piece of legislation that achieves the same budgetary result. • The Act requires a three-fifths vote of all of the members of the Senate to waive the foregoing Senate rules.62 If Congress and the president do not enact a substitute that reaches the same budgetary result, or waive the foregoing rules with a three-fifths majority in the Senate, then IPAB’s legislative proposal automatically becomes law, and the Act requires the Secretary of Health and Human Services to implement it.66

3. In 2020, Congress Loses All Power to Control IPAB PPACA requires the Secretary of Health and Human Services to enact all IPAB proposals with only three exceptions. The first exception is that the Secretary shall not implement proposals issued before the year 2020 if Congress supersedes them, which requires Congress either to enact an equivalent substitute or to muster a three-fifths majority in the Senate to block a proposal.63 The second is that the Secretary shall not implement any IPAB proposal after the year 2019 if Congress repeals IPAB in 2017 through the highly restrictive process described below. If, however, Congress fails to repeal IPAB through that process, this exception prevents Congress from rejecting or altering any IPAB proposal after 2019. The Act clearly states that the Secretary must implement IPAB proposals issued after 2019, unless Congress both repealed IPAB in 2017 and supersedes the proposal at hand.64 That structure may appear odd, in that it seems to imply that after 2020, a board that Congress has already repealed might nevertheless issue a proposal for Congress to supersede. The structure of this exception makes more sense, however, in the light of IPAB’s overarching purpose. If Congress fails to repeal IPAB through the prescribed process, then Congress loses its ability to alter or reject IPAB proposals, and the Secretary must implement all such proposals. This plain-meaning interpretation of the statute is consistent with PPACA’s goal of limiting Congress’ ability to interfere with IPAB’s lawmaking powers. The combined effect of these first two exceptions is that Congress may amend or reject IPAB proposals, subject to stringent limitations, but only from 2015 through 2019. If Congress fails to repeal IPAB in 2017, then after 2019, IPAB may legislate without any congressional interference. The Secretary must implement all IPAB proposals as written, subject to the third exception, below.

The third exception applies in 2019 and thereafter. The Act directs the Secretary not to implement an IPAB proposal if the chief Medicare actuary projects the growth rate of per capita national health expenditures will exceed the growth rate of per-enrollee Medicare expenditures. This exception may not apply in two consecutive years.65 In all other cases, the Act requires the Secretary to implement all IPAB proposals. Worse, if Congress fails to repeal IPAB through the restrictive procedure laid out in the Act, then after 2020, Congress loses the ability even to offer substitutes for IPAB proposals. As explained in Box 3, in that case the Act requires the Secretary to implement IPAB’s proposals even if Congress does enact a substitute. To constrain IPAB at all after 2020, Congress must repeal it between January and August in 2017. Finally, PPACA gives IPAB and the Secretary the sole authority to judge their own actions by prohibiting administrative or judicial review of the Secretary’s implementation of an IPAB proposal.67

Shielding IPAB from the People Consistent with their attempts to protect individual IPAB proposals, Congress and President Obama went to extraordinary, unconstitutional, and even absurd lengths to try to protect IPAB from itself being repealed by future Congresses. The Act states that Congress may only repeal IPAB if it follows these precise steps: 1. Wait until the year 2017. 2. Introduce a specifically worded “Joint Resolution” in the House and Senate between January 1 and February 1. 3. Pass that resolution with a three-fifths vote of all members of each chamber by August 15.68 The president must then sign that joint resolution. Whereas Congress can repeal any other federal statute at any time with just a majority vote in each chamber and the president’s signature, under PPACA Congress has only about 15 business days in the year 2017 to propose this joint resolution of repeal. Otherwise, the Act forever precludes repeal. Congress must then pass that resolution with a three-fifths supermajority by August 15, 2017, or the Act forever precludes repeal. Even if a repeal resolution should clear these hurdles, IPAB would retain its power to legislate through January 15, 2018.69 If Congress fails to follow these precise steps, then PPACA states the American people’s elected representatives may never repeal IPAB, ever. An Implausible Reinterpretation The Obama administration has argued in federal court that the language concerning a repeal resolution merely “establishes one way for Congress to repeal the Board if Congress wishes the repeal effort to qualify for the expedited procedures established by that provision.”70 That interpretation does not square with the plain meaning or the structure of the statute. First, the administration ignores the clear language of the Act, which states a “Joint Resolution [Is]

Required To Discontinue the Board.”71 Not optional, but required. Only in Washington, D.C., could a statute stating that a “Joint Resolution [Is] Required To Discontinue the Board,” mean that a joint resolution is not required to discontinue that board. Second, the anti-repeal provisions cannot plausibly be described as creating an “expedited procedure.” While PPACA does exempt a repeal resolution from some of Congress’s procedural hurdles, it also sets a higher bar for approval: a three-fifths majority in both chambers. Moreover, those exemptions cannot be invoked until 2017 and would have no force until 2020. (Box 4 explains the differences between “fast track” congressional rules, and the rules protecting IPAB.) Only in Washington could a provision that prevents Congress from introducing a resolution for seven years, and then prevents that resolution from taking effect for an additional three years, be described as an “expedited” procedure. Third, the structure of PPACA clearly shows it attempts to deny Congress the power to repeal IPAB outside of the “joint resolution” procedure. As explained in Box 3, the Act requires the secretary to implement IPAB proposals with only three exceptions: (1) if, in years prior to 2020, Congress supersedes an IPAB proposal; (2) if, in 2020 and thereafter, Congress has already approved the specifically worded and time-limited joint resolution of repeal and supersedes IPAB’s proposal; and (3) if, in 2019 and thereafter, Medicare’s actuaries project that national health expenditures will grow more rapidly than per-enrollee Medicare spending.79 If the Act merely “establishes one way for Congress to repeal the Board,” then there would have been no need to list the second exception, because any method of repeal would relieve the Secretary of her duty to implement IPAB proposals. Alternatively, the Act would have to include a fourth exception explaining that any method of repeal other than the specifically worded joint resolution would also relieve the Secretary of this duty. Yet the Act clearly requires the Secretary to implement IPAB proposals unless Congress enacts the specifically worded repeal resolution within the statutory time limits.

4. Far Beyond “Fast-Track” Authority PPACA’s defenders claim that the Act’s limitations on Congress’s ability to alter and reject IPAB proposals, or to repeal IPAB, are no different from “fast-track authority,” where Congress provides for expedited procedures for committee and floor action on specifically defined types of bills or resolutions.72 The administration defends IPAB by likening it to the Defense Base Closure and Realignment Commission (BRAC)73 and the Congressional Review Act (CRA), 74 both of which established fast-track procedures for Congress’s disapproval of agency regulations. In reality, neither BRAC nor CRA has anything in common with IPAB in terms of purpose, policy, procedure, or the creation of a lawmaking entity independent from Congress and the courts. Moreover, both the BRAC and CRA statutes included provisions for congressional oversight and constraint, which IPAB lacks. The Defense Base Closure and Realignment Commission Congress established BRAC and charged it with issuing recommendations regarding the closure and realignment of military installations, through what the Supreme Court has described as an “elaborate process.”75 BRAC’s task did not even begin until after the Secretary of Defense prepared closure and

realignment recommendations, based on statutorily set selection criteria, which he established after notice and an opportunity for public comment. Congress required BRAC to hold public hearings and prepare a report on those recommendations before issuing its own recommendations.76 The president retained the authority to decide whether to submit BRAC’s recommendations to Congress. Congress then had the opportunity to enact a resolution to disapprove the recommendations and bar the closures, under normal congressional rules and without any further action.77 PPACA contains no similar requirements for public input or presidential review of IPAB’s proposals before they become law, and it does not permit a simple congressional disapproval. Peter Orszag approvingly notes that Congress and the president will have less power to stop IPAB’s proposals than they had to stop BRAC’s proposals.78 The Congressional Review Act The CRA is also entirely different from IPAB’s enabling legislation. The CRA establishes expedited procedures allowing Congress to disapprove agency regulations. While it establishes a fasttrack procedure for review of regulations, it does nothing to alter the administrative rulemaking process or judicial review of regulations; nor does it entrench regulations from repeal or amendment; nor does it condition Congress’s power to strike down a regulation on Congress enacting a statute that achieves an equivalent result. The difference in the substance of the two statutes is no less stark. While the CRA protects Congress’s lawmaking power from encroachment by the executive branch, IPAB encroaches on that very power. The Obama administration’s reinterpretation of IPAB’s anti-repeal provisions is absurd on its face. Those provisions can have no other meaning than to prohibit Congress from repealing IPAB through any other process. If PPACA’s authors had their way, IPAB would be the most unrepealable provision in federal law. After 2017, Congress could repeal Medicare, but not the board it created to run Medicare. Congress (and the states) could repeal the Bill of Rights. But not IPAB.

IPAB versus the Constitution As the foregoing analysis suggests, IPAB’s constitutional infirmities are numerous. An Unconstitutional Delegation of Legislative Power Congress’s attempt to delegate its legislative powers to IPAB lies beyond the legislative power that the people delegated to Congress through the U.S. Constitution. Article I, Section 1, of the Constitution states, “All legislative Powers herein granted shall be vested in a Congress of the United States . . . ”80 The Supreme Court has explained that Congress may not “abdicate, or . . . transfer to others, the essential legislative functions with which it is vested.”81 The Court has held that, while Congress may create administrative agencies and commissions, it may not yield to another authority the ultimate power to make law. The Supreme Court has indicated that the “true distinction” between legitimate and illegitimate delegations of authority is that an agency may not

exercise the power to make law, but may be given the “authority or discretion as to its execution, to be exercised under and in pursuance of the law.”82 This is a distinction “of degree,”83 and “varies according to the scope of the power congressionally conferred.”84 In other words, the broader the authority conferred on an agency, the more tightly it must be bound by legislative, judicial, or executive oversight, and the more precise and narrow its instructions from Congress must be. Accordingly, the Supreme Court has held that the legislative power of Congress does not include the power to delegate legislative authority to an executive agency unless Congress provides an “intelligible principle” that constrains the exercise of such authority. 85 This intelligible-principle test is one that examines the totality of the circumstances, “standards, definitions, context, and reference to past administrative practice” in the statute empowering the agency in order to determine whether the agency’s decisionmaking is properly guided and confined.86 Congress’s unprecedented delegation of legislative power to IPAB fails this test. The Act provides almost no limit on IPAB’s legislative powers, and no intelligible standard constraining the exercise of those powers. While the absence of judicial review and rulemaking requirements do not in themselves make IPAB unconstitutional under the intelligible principles test, they are factors the Supreme Court has used to analyze the constitutionality of congressional delegation. In J. W. Hampton v. United States , the Court upheld a delegation to the Tariff Commission in part because the agency issued recommendations only after giving notice and an opportunity to be heard.87 Likewise, in Mistretta v. United States , the Court emphasized that the Sentencing Commission engaged in Administrative Procedures Act noticeand-comment rulemaking and was fully accountable to Congress, “which can revoke or amend any or all of the [Commission’s] Guidelines as it sees fit either within the 180-day waiting period . . . or at any time.”88 The Independent Payment Advisory Board need not engage in notice-and-comment rulemaking, and PPACA constrains Congress’s ability to revoke or amend IPAB’s edicts. Not long ago, Supreme Court Justice Antonin Scalia predicted that, unless courts rigorously enforce the constitutional prohibition on delegations of legislative power, Congress could create: “expert” bodies, insulated from the political process, to which Congress will delegate various portions of its lawmaking responsibility. How tempting to create an expert Medical Commission (mostly M.D.s, with perhaps a few Ph.D.s in moral philosophy) to dispose of such thorny, “nowin” political issues as the withholding of life-support systems in federally funded hospitals. The only governmental power the Commission possesses is the power to make law; and it is not the Congress.89 What Justice Scalia foresaw now exists in IPAB. Separation of Powers Doctrine Protects Liberty The Separation of Powers doctrine also denies Congress the authority to establish IPAB. The Constitution’s system of checks and balances among the legislature, the executive, and the judiciary exists to protect freedom.90 As the Supreme Court recently wrote, “Separation-of-powers principles are intended, in part, to protect each branch of government from incursion by others. Yet the dynamic between and among the branches is not the only object of the Constitution’s concern. The structural principles secured by the separation of powers protect the individual as well.”91

The following factors exhibit an unprecedented violation of that doctrine. The Independent Payment Advisory Board is an executive agency that possesses legislative powers. The Act delegates these legislative powers to IPAB, and potentially to a single individual, without an intelligible standard. The Board’s legislative powers are subject neither to the Administrative Procedures Act’s rulemaking requirements, nor to administrative or judicial review, nor to any meaningful congressional review. Congressional review is not meaningful because PPACA severely limits Congress’ ability to alter or amend IPAB’s proposals. The Act curtails the president’s constitutional authority to recommend only such measures as he considers expedient. The Act requires the Secretary of Health and Human Services to implement these legislative proposals without regard for congressional or presidential approval. Congress may only stop IPAB from issuing self-executing legislative proposals if three-fifths of all sworn members of Congress pass a joint resolution to dissolve IPAB during a short window in 2017. Even then, IPAB’s enabling statute dictates the terms of its own repeal, and it continues to grant IPAB the power to legislate for six months after Congress repeals it. If Congress fails to repeal IPAB through this process, then Congress can never again alter or reject IPAB’s proposals. These factors in their totality reveal an unprecedented delegation of legislative, executive, and judicial authority in violation of the Separation of Powers doctrine. Amending the Constitution by Statute The Independent Payment Advisory Board’s anti-repeal provisions are so unconstitutional as to be absurd. They would deny future Congresses their basic legislative powers, and thereby diminish Congress’s constitutional authority by statute. It is a maxim of representative government that Congress does not have the power to bind the hands of a subsequent Congress by statute. Thomas Jefferson noted that if a present legislature were to “pass any act, and declare it shall be irrevocable by subsequent assemblies, the declaration is merely void, and the act repealable, as other acts are.”92 The Supreme Court has long held that “a general law . . . may be repealed, amended or disregarded by the legislature which enacted it,” and “is not binding upon any subsequent legislature.”93 There is one lawful way for one Congress to bind future Congresses: the amendment process of Article V. 94 Anyone who wishes to deny future Congresses the legislative powers granted by the Constitution, or to limit the discretion of future presidents to recommend to Congress only those measures they consider necessary and expedient, must employ Article V’s amendment process, which requires the consent of two-thirds of the members of each chamber of Congress, and three-fourths of state legislatures. That Congress may not supersede the Constitution by statute was recognized by Justice John Marshall as being “one of the fundamental principles of our society.”95 Charles Black writes that this “most familiar and fundamental principle” has long been perceived as “so obvious as rarely to be stated.”96 Yet PPACA attempts to sidestep the inconveniences of Article V by amending the Constitution through simple congressional majorities and the president’s signature. As the Obama administration now concedes, “Nothing prevents Congress from repealing the Board via ordinary legislation.”97 This welcome admission that IPAB’s anti-repeal provisions cannot do what their authors hoped does not change the clear language and intent of those provisions, nor can it absolve Congress and President Obama from attempting to amend the Constitution via statute.

A Milestone on the Road to Serfdom The federal government’s attempts to direct America’s health care sector, up to and including IPAB, closely track the predictions Nobel laureate economist Friedrich Hayek made in his 1944 book The Road to Serfdom. Hayek explained how government planning of the economy leads to frustration with democracy and support for authoritarian forms of government such as IPAB: It may be the unanimously expressed will of the people that its parliament should prepare a comprehensive economic plan, yet neither the people nor its representatives need therefore be able to agree on any particular plan. The inability of democratic assemblies to carry out what seems to be a clear mandate of the people will inevitably cause dissatisfaction with democratic institutions. Parliaments come to be regarded as ineffective “talking shops,” unable or incompetent to carry out the tasks for which they have been chosen. The conviction grows that if efficient planning is to be done, the direction must be “taken out of politics” and placed in the hands of experts—permanent officials or independent autonomous bodies . . . The delegation of particular technical tasks to separate bodies, while a regular feature, is yet only the first step in the process whereby a democracy which embarks on planning progressively relinquishes its powers.98 Nearly eight decades before Peter Orszag argued that IPAB would “take some of the politics out” of government-run health care, Hayek presaged Orszag’s argument almost verbatim.99 Hayek then explained why authoritarian lawmaking bodies will do no better a job of directing the economy than democratic ones: The expedient of delegation cannot really remove the causes which make all the advocates of comprehensive planning so impatient with the impotence of democracy . . . [A]greement that planning is necessary, together with the inability of democratic assemblies to produce a plan, will evoke stronger and stronger demands that the government or some single individual should be given powers to act on their own responsibility. The belief is becoming more and more widespread that, if things are to get done, the responsible authorities must be freed from the fetters of democratic procedure. The cry for an economic dictator is a characteristic stage in the move toward planning.100 Those cries, Hayek wrote, will sometimes carry the day. 101 Advocates of government direction of the economy turn against democracy precisely because democracy “is an obstacle to the suppression of freedom which the direction of economic activity requires.”102 Modern Authoritarianism Compare Hayek’s predictions to current proposals offered by advocates of government direction of the economy. In 2008, former Senate Majority Leader Tom Daschle (D-SD) proposed an unelected “Federal Health Board” similar to IPAB, whose “recommendations would have teeth.”103 Such a board is necessary because: [While] there is a general agreement on basic reform principles . . . the traditional legislative

process has failed to deliver . . . Professional expertise and trustworthiness—these are qualities that Congress lacks when it comes to health care . . . In Congress, every decision is political . . . There is a strong argument to be made that appointed experts, proceeding in a deliberate, sometimes plodding way, would make better health-care decisions than politicians . . . [H]ealthcare policy shouldn’t be subject to the whims of subcommittee chairmen and special interests . . . After nearly a century of failure, it’s time to try another way.”104 Under Daschle’s proposal, Congress could overturn Federal Health Board decisions or abolish the board at any time. In other words, IPAB is more authoritarian—has more “teeth”—than even Daschle recommended. University of Chicago public health professor Harold Pollack sees IPAB as progress because “we must reduce congressional micromanagement of Medicare policy” in favor of “a more centralized approach.” Pollack concludes, “Despite many reasons for caution . . . I’m becoming more of a believer in an imperial presidency in domestic policy. Congress seems too screwed up and fragmented to address our most pressing problems.”105 Note that it would be easier to remove an “imperial president” that IPAB’s members. In an article titled, “Why We Need Less Democracy,” Peter Orszag writes, “What we need . . . are ways around our politicians.”106 Like Daschle and Pollack, Orszag does not mean that we, the people should have more freedom to make our own decisions. Orszag’s we refers to government “experts,” who should have more power to impose their decisions on the people without the people’s desires getting in the way. The problem with representative government, in Orszag’s estimation, is the representative part: In other words, radical as it sounds, we need to counter the gridlock of our political institutions by making them a bit less democratic . . . I believe that we need to jettison the Civics 101 fairy tale about pure representative democracy and instead begin to build a new set of rules and institutions that would make legislative inertia less detrimental to our nation’s long-term health.107 These new rules include “creating more independent institutions” that can impose taxes and other laws without representation. Orszag writes, “Proposals abound for expanding this type of process. In the late ’90s, economist Alan Blinder proposed shifting responsibility for tax policy to a Fed-like institution of experts.” He continues, “Perhaps the most dramatic example of this idea is the Independent Payment Advisory Board.” Orszag “wish[es] it were not necessary” to vest so much power in unelected and unaccountable government officials. Alas, “certain aspects of representative government can end up posing serious problems. And so, we might be a healthier democracy if we were a slightly less democratic one.”108 Governor Bev Perdue (D-NC) made an equally radical proposal during a discussion of how Congress might better manage the economy: You have to have more ability from Congress, I think, to work together and to get over the partisan bickering and focus on fixing things. I think we ought to suspend, perhaps, elections for Congress for two years and just tell them we won’t hold it against them, whatever decisions they make, to just let them help this country recover. I really hope that someone can agree with me on

that.109 Thankfully, this proposal did not catch fire. 110 Nevertheless, Purdue’s comments illustrate the danger Hayek identified. The federal government’s attempts to plan the health care sector of the economy have been a failure. The creation of IPAB is proof of that failure and demonstrates that government direction of the economy is a threat to democracy. This is in no small measure because, as Hayek’s analysis suggests, IPAB’s inevitable failures will generate support for even more authoritarian measures. Not that we will need to wait for IPAB to fail: President Obama proposed expanding IPAB’s powers before he even appointed a single member to the board.111

Conclusion The Patient Protection and Affordable Care Act and the Independent Payment Advisory Board are not merely unconstitutional—they are anti-constitutional. The Board is an unelected and unaccountable lawmaking body. It possesses unprecedented power to make laws free of any meaningful oversight. It is “independent” in the worst sense of the word: independent of Congress, independent of the president, independent of the judiciary, and independent of the will of the people. Through this Act, Congress and President Obama attempted to rewrite multiple provisions of the Constitution, to deny future Congresses their powers under the Constitution, to deny current and future voters their right to alter and abolish unjust laws, and to deny the judiciary its role as a check against unjust laws. If IPAB survives— if Congress and President Obama succeed in amending various provisions of the U.S. Constitution by statute—then the United States will have a Constitution in name only. The United States will have become a de facto majoritarian democracy or worse, in which the majority always has the option of surrendering even more power to unelected bureaucrats, but not necessarily the option of reclaiming it. Congress, not the Constitution, will define the limits of its own power. Congress will vest whatever powers its majorities choose in whatever individuals they deem fit. The Independent Payment Advisory Board poses a threat to the U.S. Constitution and representative government that transcends party and ideology, and that has earned IPAB opponents of all political stripes. Among the many legal challenges to PPACA is Coons v. Geithner, a lawsuit challenging IPAB as an unconstitutional delegation of Congress’s lawmaking authority. 112 But Congress need not wait for the courts to strike down IPAB. It can assert the powers that PPACA purports to deny it by repealing IPAB. Legislation to repeal the board has garnered 235 cosponsors in the House of Representatives—a majority of the House, including 20 Democrats.113 A modified version of that bill passed the House with 223 votes (including seven Democrats), and the House has voted to repeal PPACA in its entirety.114 It is tempting to dismiss IPAB as an absurdity that the body politic will soon reject. Unless and until that occurs, IPAB will empower as few as one unelected government official to ration health care to all Americans; to impose any tax or regulation; to appropriate funds; and to wield many other lawmaking powers.

63. 42 U.S.C. § 1395kkk (e)(3)(A)(i). 64. The relevant language is: “ (3) EXCEPTIONS. “ (A) IN GENERAL.—The Secretary shall not implement the recommendations contained in a proposal submitted in a proposal year by the Board or the President to Congress pursuant to this section if— “ (i) prior to August 15 of the proposal year, Federal legislation is enacted that includes the following provision: ‘This Act supercedes [sic] the recommendations of the Board contained in the proposal submitted, in the year which includes the date of enactment of this Act, to Congress under section 1899A of the Social Security Act.’; and “ (ii) in the case of implementation year 2020 and subsequent implementation years, a joint resolution described in subsection (f)(1) is enacted not later than August 15, 2017. 42 U.S.C. § 1395kkk (e)(3)(A). The first exception derives fromclause (i) and applies only through the year 2020. The second exception emerges fromthe interaction of clauses (i) and (ii). The key termis the “ and” that joins the two clauses. Both conditions must hold for the second exception to relieve the Secretary of her duty to implement an IPAB proposal issued in 2020 of thereafter. 65. 42 U.S.C. § 1395kkk (e)(3)(B). 66. H.R. 3590 (as modified by H.R. 4872) § 3403 (42 U.S.C. § 1395kkk(e)(1) (2010)). 67. 42 U.S.C. §1395kkk(e)(5). 68. H.R. 3590 (as modified by H.R. 4872) § 3403 (42 U.S.C. § 1395kkk(f) (2010)); but see, due to an apparent scrivener’s error, § 1395kkk(f)(1) should cross-reference subsection (e)(3)(A), not (e)(3)(B). 69. 42 U.S.C. § 1395kkk(e)(3)(A). 70. Nick Coons et al. v. Timothy Geithner et al., Motion to dismiss, CV-10-1714-PHX-GMS, at 45, (D. Ariz. May 31, 2011), http://aca-litigation.wikispaces.com/file/view/U.S.+motion+to+dismiss+%2805.31.11%29.pdf. Emphasis in original. 71. 42 U.S.C. § 1395kkk (f). 72. Several IPAB provisions are designated “ fast track.” See 42 U.S.C. § 1395kkk (d)(3)(A)-(E) and (d)(4)(A)-(F). 73. 10 U.S.C. § 2687. 74. 5 U.S.C. §§ 801–808. 75. See Dalton v. Specter , 511 U.S. 462, 464–465 (1994). 76. Ibid. 77. Ibid. 78. Peter R. Orszag, “ Too Much of a Good Thing.” 79. 42 U.S.C. § 1395kkk (e)(3). 80. U.S. Const. art. I, § 1. 81. Currin v. W allace, 306 U.S. 1, 15 (1939). 82. Loving , 517 U.S. 748, 758–59 (1996). 83. Mistretta v. United States , 488 U.S. 361, 415 (1989) (Scalia, J. dissenting). 84. W hitman v. Am. Trucking Ass’ns, Inc., 531 U.S. 457, 475 (2001). 85. J. W . Hampton v. United States , 276 U.S. 394, 409 (1928). 86. See Bowsher v. Synar , 478 U.S. 714, 720 (1986). 87. Hampton , 276 U.S. at 405. 88. Mistretta , 488 U.S. at 393–94. See also United States v. Lopez , 938 F.2d 1293, 1297 (D.C. Cir. 1991) (the lack of judicial review in the Sentencing ReformAct was offset by “ ample provision for review of the guidelines by the Congress and the public” and, thus, “ no additional review of the guidelines as a whole is either necessary or desirable”); Sentencing Act, 28 U.S.C. § 994(p).

89. Mistretta , 488 U.S. at 422. 90. Loving v. United States , 517 U.S. at 756. 91. Bond v. United States , 2011 WL 2369334 *8 (June 16, 2011). 92. Thomas Jefferson, Notes on the State of Virginia (Boston, MA: Wells and Lilly, 1829), p. 126, http://books.google.com/books? id=Nbw9AAAAYAAJ&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false. 93. Manigault v. Springs , 199 U.S. 473, 487 (1905); see also Street v. United States , 133 U.S. 299, 300 (1890) (holding that an act of Congress “ could not have . . . any effect on the power of a subsequent Congress”); and Reichelderfer v. Quinn , 287 U.S. 315, 318 (1932) (stating that “ the will of a particular Congress . . . does not impose itself upon those to follow in succeeding years”). 94. “ The Congress, whenever two thirds of both Houses shall deemit necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when ratified by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress; Provided that no Amendment which may be made prior to the Year One thousand eight hundred and eight shall in any Manner affect the first and fourth Clauses in the Ninth Section of the first Article; and that no State, without its Consent, shall be deprived of its equal Suffrage in the Senate.” U.S. Const. art. V. 95. Marbury v. Madison , 5 U.S. 137, 177 (1803). 96. Charles L. Black, Jr., “ Amending the Constitution: A Letter to a Congressman,” Faculty Scholarship Series , Paper 2597, December 1972, http://digitalcommons.law.yale.edu/fss_papers/2597. 97. Nick Coons et al. v. Timothy Geithner et al ., Motion to dismiss. 98. F. A. Hayek, The Road to Serfdom , 50th Anniversary Edition (Chicago: University of Chicago Press, 1994), pp. 69–70. This dynamic obviously holds whether government attempts to direct the entire economy or just one-sixth of it. 99. Peter R. Orszag, “ Medicare Spending Slows as Hospitals Improve Care.” Compare with Hayek’s “ taken out of politics” quote, above. 100. Hayek, The Road to Serfdom , pp. 74, 75. 101. Ibid., p. 75. It is a myth that Hayek claimed government planning of the economy inevitably leads to dictatorship (see pp. 3, 6): “ Nor amI arguing that these developments are inevitable. If they were, there would be no point in writing this.” 102. Ibid., pp. 69–79. Hayek clarified that the government intervention in the economy is dangerous not because it threatens democracy per se, but the freedoms that democracy exists to protect: “ The fashionable concentration on democracy as the main value threatened is not without danger. It is largely responsible for the misleading and unfounded belief that, so long as the ultimate source of power is the will of the majority, the power cannot be arbitrary . . . Democratic control may prevent power frombecoming arbitrary, but it does not do so by its mere existence. If democracy resolves on a task which necessarily involves the use of power which cannot be guided by fixed rules, it must become arbitrary power.” Hayek, p. 79. 103. TomDaschle, Scott S. Greenberger, and Jeanne M. Lambrew, Critical: W hat W e Can Do about The Health-Care Crisis (New York: Thomas Dunne Books, 2008), p. 179. 104. Ibid., pp. 107, 108, 115, 134–36. 105. Harold Pollack, “ The Real Problemwith the Independent Payment Advisory Board,” Tapped (The American Prospect blog), April 23, 2011, http://prospect.org/csnc/blogs/tapped_archive? month=04&year=2011&base_name=the_real_problem_with_the_inde. 106. Orszag, “ Too Much of a Good Thing: Why We Need Less Democracy.” 107. Ibid. 108. Ibid.

109. J. B. Frank, “ Perdue Jokes about Suspending Congressional Elections for Two Years,” Charlotte News-Observer (blog), September 27, 2011, http://projects.newsobserver.com/under_the_dome/perdue_suggests_suspending_congressional_elections_for_two_years_was_she_serious “ The comment—which came during a discussion of the economy—perked more than a few ears. It’s unclear whether Perdue, a Democrat, is serious—but her tone was level and she asked others to support her on the idea.” A Perdue spokesman said the

Can We Stop Calling Them “Consumer Protections” Now? by Michael F. Cannon

Supporters of the health law are lamenting how the nickname “ObamaCare” has achieved wider purchase than the law’s official title. More egregious, though, is how supporters have successfully misbranded ObamaCare’s health insurance regulations as “consumer protections.” In anticipation of the (now-postponed) House vote to repeal ObamaCare, for example, three Obama cabinet officials last week warned House Speaker John Boehner, R-Ohio, about the consequences of eliminating the law’s “consumer protections.” Major media outlets routinely play along. The New York Times reports, “Many of the law’s consumer protections take effect [January 1]. Health plans generally must allow adult children up to age 26 to stay on their parents’ policies and cannot charge co-payments for preventive services or impose a lifetime limit on benefits. Other “consumer protections” already in place limit the percentage of revenues insurers can spend on administrative expenses and prohibit them from turning away children with pre-existing conditions. Who could object to such rules? As it happens, an awful lot of people. These supposed consumer protections are hurting millions of Americans by increasing the cost of insurance, increasing the cost of hiring and driving insurers out of business. At the same time Secretary of Health and Human Services Kathleen Sebelius was threatening to bankrupt insurers who claim ObamaCare is increasing premiums by more than 1 percent, her own employees estimated that one of the law’s regulations—the requirement to purchase unlimited annual coverage—will increase some people’s premiums by 7 percent or more when fully implemented. A Connecticut insurer estimated that just the provisions taking effect last year would increase some premiums by 20–30 percent. Such mandates force consumers to divert income from food, housing, and education to pay for the additional coverage. That can leave consumers worse off, even threaten their health. They can also force employers to reduce hiring, leaving some Americans with neither a job nor health insurance. This reality led McDonald’s to seek a waiver from the unlimited annual coverage mandate, among other rules. The ban on discriminating against children with pre-existing conditions has caused insurers to stop selling child-only policies in dozens of states. The dependent-coverage mandate was cited as one of the reasons spurring a Service Employees International Union local in New York City to eliminate coverage for 6,000 dependent children. In 2008, Congress passed a similar mandate that supporters said would expand coverage for mentalhealth and substance-abuse services. Instead, that mandate spurred the Screen Actors Guild to eliminate mental-health coverage for 12,000 of its lower-paid members. It had the same effect on 3,500 members of the Chicago’s Plumbers Welfare Fund, and 2,200 employees of Woodman’s Food Market in Wisconsin.

Other employers are curtailing access to mental-health services thanks to this mandate, and some insurers have stopped selling such coverage altogether. The list goes on. ObamaCare now forces insurers to spend no more than 20 percent of revenues—15 percent for large employers—on administrative expenses. Similar state laws have done nothing to slow the growth of premiums. ObamaCare’s rule spurred Principal Financial Group to stop selling health insurance before it even took effect, leaving nearly 1 million consumers to find new coverage and threatening their continuity of care. Experts expect more consumers to suffer the same fate. This supposed consumer protection also punishes efforts to reduce fraud and improve quality by reviewing claims. Thus, in addition to increasing premiums, it may expose patients to unnecessary and even harmful services. Consumers, insurers, employers, unions and state officials are begging for protection from these socalled protections. Sebelius has so far issued 222 waivers, which raises the question: if these were really consumer protections, why waive them? These rules may end up helping somebody, and that should count in the law’s favor. Yet rules that were supposed to protect children have stripped sick kids of their health insurance and made it harder for parents to find coverage for kids who may soon fall ill. Other rules have reduced wages and discouraged hiring amid high unemployment. Just as the mental-health mandate is ousting vulnerable patients from their rehab or therapy and cutting off their meds, ObamaCare’s voluminous mandates are threatening even more Americans’ access to care. Calling these rules “consumer protections” implies that the people harmed don’t matter, or one has clairvoyance to know that the benefits outweigh the costs. ObamaCare supporters should call these supposed consumer protections what they are: regulations that can hurt even more than they help. This article appeared on Kaiser Health News.org on January 10, 2011.

Chapter 45

BCBSNC’s Premium Refunds Show the Perils of ObamaCare by Michael F. Cannon

Some of the worst news for President Barack Obama’s beleaguered health care law comes from North Carolina. Yet the law’s supporters are treating it like good news. When President Obama signed his health care overhaul into law in March, he said it would “lower costs for families and for businesses” and that “children who have a pre-existing condition will finally be able to purchase the coverage they need.” Much has already been made of the fact that ObamaCare is instead triggering premiums hikes as high as 30 percent and causing insurers to flee the market for childonly coverage. But BlueCross BlueShield of North Carolina’s announcement that it will refund $156 million to policyholders shows that ObamaCare is replacing badly needed consumer protections with price controls that imperil access to care for the seriously ill. Market competition long ago generated a consumer protection called a renewal guarantee: if you get sick, your premiums rise at the same rate as the healthy people in your pool. To deliver that protection, insurers collect extra money from healthy policyholders up front to cover the future medical bills of those who become seriously ill. That $156 million is the money BCBSNC collected to pay the future medical bills of its policyholders. In 2014, however, ObamaCare will eliminate BCBSNC’s “guaranteed renewable” plans. The law will also require insurers to charge everyone in a given age group the same premium, regardless of risk. Since BCBSNC now only needs enough to cover their sick policyholders for three more years, they refunded policyholders an average of $725. Secretary of Health and Human Services Kathleen Sebelius praised the refunds as evidence of ObamaCare’s benevolence. Sebelius has it entirely backward. Guaranteed renewability protects consumers by enabling insurers to profit from covering the sick. ObamaCare is replacing that protection with government price controls that will reduce access to care for the seriously ill by turning the sick into a losing proposition for insurers. Here’s how. Suppose that, within a given age group, healthy people cost $5,000 to insure, while the seriously ill cost $25,000. When ObamaCare’s price controls force insurers to charge everyone the same premium (say, $10,000), insurers will compete to enroll healthy people (profit: $5,000) and avoid the sick (loss: $15,000). If they don’t flee the market entirely—which is already happening in the market for child-only coverage—insurers will keep seriously ill patients away by providing lousy access to care. BCBSNC’s refunds show that ObamaCare is leaving seriously ill patients with less protection, not more. Health insurance was hardly perfect before ObamaCare, but BCBSNC’s policyholders had insurance that had pre-funded many of their future medical bills. Now, ObamaCare has effectively transferred those reserves from the sick to the healthy.

Seriously ill policyholders now have less protection against BCBSNC reneging on its commitments to them. Competition used to discourage skimping; ObamaCare rewards it. This article appeared in The Charlotte Observer on October 6, 2010.

Chapter 46

Why ObamaCare Won’t Help the Sick by Michael F. Cannon

The Financial Times published my letter to the editor [$]: Sir, “Imminent ‘ObamaCare’ ruling poses challenge for Republicans” [$] (May 25) doesn’t quite capture my views when it reports that I believe “resurrecting protections for patients with preexisting conditions would be wrong.” ObamaCare is wrong precisely because those provisions will not protect patients with pre-existing conditions. Those “protections” are nothing more than government price controls that force carriers to sell insurance to the sick at a premium far below the cost of the claims they incur. As a result, whichever carrier attracts the most sick patients goes out of business. The ensuing race to the bottom will even harm sick Americans who currently have secure coverage. The debate over ObamaCare is not between people who care and people who don’t care. It is between people who know how to help the sick, and those who don’t. This article appeared on June 4, 2012 on [email protected]

A ‘Soviet-Style Power-Grab,’ to Squelch Bad Press for ObamaCare by Michael F. Cannon

The Department of Health and Human Services has released new guidelines on communications between department employees and the media. The guidelines evidently require all communications to be approved by the Assistant Secretary for Public Affairs. Also: no off-the-record communications. The media are not happy. The editor of FDA Webview & FDA Review writes (via Poynter; more here): The new formal HHS Guidelines on the Provision of Information to the News Media represent, to this 36-year veteran of reporting FDA news, a Soviet-style power-grab. By requiring all HHS employees to arrange their information-sharing with news media through their agency press office, HHS has formalized a creeping information-control mechanism that informally began during the Clinton Administration and was accelerated by the Bush and Obama administrations. The U.S. now takes a large step toward joining other information-controlling countries like my native Australia, where government employees who talk with the news media without permission commit a federal crime. I came to the U.S. in 1974 to escape this oppression. The HHS guidelines once again show that the purpose of a public information office is not to disseminate information to the public but to withhold information from the public. Since this came on the heels of an HHS official announcing that the agency is scuttling ObamaCare‘s long-term care entitlement, a.k.a. the “CLASS Act,” one wonders if there is a connection. Or maybe HHS is just motivated by a general fear that the more the public learns about ObamaCare, the less we will like it. (Update: Turns out, HHS released their new guidelines the same day that agency official voiced his opinion about the future of the CLASS Act. HT: Chris Jacobs.) This article appeared on September 27, 2011 on [email protected]

Chapter 48

ObamaCare Is Not Pro-Choice—for Anyone by Michael F. Cannon

This is a health care bill, not an abortion bill,” says President Obama. Au contraire, mon frère. Whatever your views on abortion, the fight over abortion in the Obama health plan illustrates perfectly why government should stay out of health care. When the government subsidizes health care, anything you do with that money becomes the voters’ business. And rather than allow for choice between different ways of doing things, the government typically imposes the preferences of the majority—or sometimes, a vocal minority—on everybody. On Saturday, the House of Representatives passed their version of President Obama’s health care overhaul. Among other things, the legislation would subsidize private health insurance for millions of Americans. To appease pro-life Democrats, Speaker Nancy Pelosi (D-Calif.) allowed them to insert an amendment to prohibit taxpayer dollars from touching any health insurance plan that covers abortion. House Majority Whip Jim Clyburn (D-S.C.) says the bill would have come up 10 votes short without it. The amendment incensed pro-choice Democrats. The bill’s subsidies would be so pervasive that prohibiting the use of taxpayer dollars for abortion coverage would restrict access to such coverage even for women who don’t use the subsidies. Rep. Diana DeGette (Colo.) says she and 40 other pro-choice Democrats “are not going to let this into law.” Democratic leaders are searching for a compromise, but there is no way to split the baby here. Either the government will force taxpayers to fund abortions, or the restrictions necessary to prevent taxpayer funding will reduce access to abortion coverage. There is no middle ground. Somebody has to lose. Welcome to government-run health care. The same thing happens, in all areas of health care, whenever government foots the bill. Do you think chiropractic is nonsense? Too bad, the government forces you to pay for it through Medicare. Faith healing seem like quackery too you? Sorry, Charlie. Medicare and Medicaid force you to pay for faith healers at prices “comparable with those of real health care providers,” according to law professors David Hyman and Charles Silver. The problem extends far beyond those trivial examples. The government uses price and exchange controls to pay health care providers. We call those controls Medicare’s “fee-for-service payment system” in polite company. Yet the effects are anything but genteel. Researchers believe Medicare’s exchange controls encourage unnecessary services, which account for at least one third of its $430 billion budget, according to the Dartmouth Atlas. Those controls actually penalize doctors and hospitals that coordinate care, use electronic medical records, or try to reduce the estimated 100,000 annual deaths due to medical errors. Congress has “reformed” Medicare’s exchange controls approximately once in the program’s 43-year history, with a “payment system” that encourages an estimated $12 billion of avoidable hospitalizations per year.

President Obama’s economic advisor Larry Summers sums it up: “Price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time.” Should grandma want to escape Medicare’s price and exchange controls—if she would rather see a doctor that operates under less-perverse financial incentives—too bad. If she would prefer a smaller network of doctors that provides safer, more convenient, coordinated care, she’s out of luck. The choice of what kind of medicine she receives belongs to the majority, or a vocal minority. To be fair, the Medicare Advantage program allows some seniors to escape the traditional Medicare program’s price and exchange controls. But Medicare Advantage has its own perversities, thanks to a separate price-and-exchange-control scheme the government uses to pay participating insurers. And in keeping with the overall hypothesis, Democrats are trying to eliminate Medicare Advantage, anyway. Pro-choice Democrats want to preserve access to private abortion coverage. Pro-life Democrats want to preserve the right to choose whether to fund abortions. Fair enough. But any vote for government subsidies is a vote against choice. Get government out of health care, and you’ll be able to make choices for yourself. Not before. This article appeared on TownHall.com on November 13, 2009.

Chapter 49

The Illiberality of ObamaCare by Michael F. Cannon

On Friday, President Obama tried to quell the uproar over his ongoing effort to force Catholics (and everyone else) to pay for contraceptives, sterilization, and pharmaceutical abortions. Unfortunately, the non-compromise he floated does not reduce by one penny the amount of money he would force Catholics to spend on those items. Worse, this mandate is just one manifestation of how the president’s health care law will grind up the freedom of every American. Even though the contraceptives mandate exempts parish priests and the Church hierarchy, it still violates Catholics’ religious liberty in at least four ways. First, the mandate fines Catholic institutions like Notre Dame and the Eternal World Television Network that adhere to the Church’s teaching that contraception “is an offense against the law of God and of nature, and those who indulge in such are branded with the guilt of a grave sin.” In order not to sin against their God, these employers must now pay tribute to Caesar. Second, it takes away the freedom of Catholics to donate to institutions that uphold their religious views. There is a reason my parents donate to Catholic institutions rather than Planned Parenthood: they don’t want to fund contraception. The mandate takes away that choice. Third, it violates the freedom of Catholic business owners. How is it that the First Amendment protects the religious liberty of the employers who sit on the altar, but not the equally devout employers who sit in the pews? Fourth, it violates the freedom of Catholic workers by forcing nearly every individual American to purchase contraceptive coverage. How is it that the First Amendment protects a devout Catholic if she works as a secretary for her local parish, but not if she works as a scientist at an environmental consulting firm? The administration’s defense of the mandate—that a majority of self-identified Catholics use contraception and that some Catholic institutions already cover it—likewise has at least four flaws. First, thank God we don’t live in a theocracy that forces those folks to adhere to Church dogma. But why should the government commit the opposite sin of forcing doctrinaire Catholics to violate a religious principle that imposes no harm on others? Second, Catholics are not the only ones who consider contraception sinful. Third, it is nonsense to argue that the percentage of Americans who believe contraception is forbidden by God is small enough that the First Amendment doesn’t apply to them; the whole point of the First Amendment is to protect minorities. Devout Catholics are a minority, but they are quite sincere. Finally, it’s not just people who consider contraception sinful that oppose this mandate. That’s because the mandate also violates the freedom of those who have non-religious reasons for not wanting to purchase contraceptives, who would rather pay for contraceptives out of pocket, or who want such coverage now but might change their minds in the future.

Rather than respect each individual’s freedom to make their own choice, President Obama demands that even those who will never need contraception—gays, lesbians, the post-menopausal, the celibate, the infertile—must underwrite other people’s sex lives. In his most recent address to Congress, President Obama asked Americans to emulate the military, encouraging us not to “obsess over [our] differences,” but to “focus on the mission at hand.” The president seeks to achieve universal health insurance coverage by forcing everyone to purchase it. With a populace sharply divided over what health insurance should include, however, that mission becomes an altar for sacrificing individual rights. President Obama is not the first world leader to call on his people to subordinate their essential diversity and freedom to a military ethos. Even left-wing Catholics like E.J. Dionne and Sen. Bob Casey (D-Pa.) protested the health care law’s impact on this one type of liberty. That suggests how illiberal an enterprise universal coverage really is. This article appeared on The Huffington Post on February 14, 2012.

President Obama is catching some well-earned blowback for his decision to force religious institutions “to pay for health insurance that covers sterilization, contraceptives and abortifacients.” You see, ObamaCare penalizes individuals (employers) who don’t purchase (offer) a certain minimum package of health insurance coverage. The Obama administration is demanding that coverage must include the aforementioned reproductive care services. The exception for religious institutions that object to such coverage is so narrow that, as one wag put it, not even Jesus would qualify. HHS Secretary Kathleen Sebelius reassures us, “I believe this proposal strikes the appropriate balance between respecting religious freedom and increasing access to important preventive services.” Ummm, Madam Secretary . . . the Constitution only mentions one of those things. The Catholic church is hopping mad. Even the reliably left-wing E.J. Dionne is angry, writing that the President “utterly botched” the issue “not once but twice” and “threw his progressive Catholic allies under the bus.” As I wrote over and over as Congress debated ObamaCare, anger and division are inevitable consequences of this law. I recently debated the merits of ObamaCare’s individual mandate on the pages of the Wall Street Journal. Here’s a paragraph that got cut from my essay: We can be certain . . . that the mandate will divide the nation. An individual mandate guarantees that the government—not you—will decide what medical services you will purchase, including contraceptives, fertility services that result in the destruction of human embryos, or elective abortions. The same apparatus that can force Americans to subsidize elective abortions can also be used to ban private abortion coverage once the other team wins. The rancor will only grow. Or as I put it in 2009, Either the government will force taxpayers to fund abortions, or the restrictions necessary to prevent taxpayer funding will reduce access to abortion coverage. There is no middle ground. Somebody has to lose. Welcome to government-run health care. The same is true for contraception. The rancor will grow until we repeal this law. ObamaCare highlights a choice that religious organizations—such as the United States Conference of Catholic Bishops, where my grandfather served as counsel—have to make. Either they stop casting their lots with Caesar and join the fight to repeal government health care mandates and subsidies, or they forfeit any right to complain when Caesar turns on them. Matthew 26:52. This article appeared on February 1, 2012 on [email protected]

Chapter 51

Republicans Must Stop Fighting against Birth Control and Battle Government Control Instead by Michael D. Tanner

With his mandate that all employers, including religiously affiliated institutions such as Catholic hospitals and charities, provide workers with health insurance that covers contraceptives, President Obama handed Republicans a terrific opportunity to talk about the growing intrusiveness of government. This is, after all, an administration that wants to dictate what foods we eat, what lightbulbs we use, what cars we drive, even how our toilets flush. Yet Republicans are in the process of fumbling this opportunity away by turning what should be a discussion of government power into an argument about contraception. For a long time, it was said that Democrats are terrified that somewhere someone is making money, and Republicans are terrified that someone somewhere is having fun. And with this issue—as so often seems the case when the subject turns to sex—Republicans seem determined to prove this stereotype true. The most obvious case was the suggestion by Foster Friess, the biggest funder of Republican presidential candidate Rick Santorum’s super PAC, that the best contraception was for women to put an aspirin between their knees. Friess now suggests that he was joking. Yet Rush Limbaugh and Sean Hannity, among others, have joined in with this line of argument, suggesting that contraception was unnecessary if women just exercised “self-restraint.” Running through the Republican outrage over this issue has been a subcurrent that contraceptives are, in Santorum’s words, “a license to do things in the sexual realm that is counter to how things are supposed to be.” Setting aside the fact that even married women use contraceptives, why are Republicans using this issue to lecture us on morality? The problem with the contraceptive mandate is not the contraceptive part—it’s the mandate. The new health-care law requires every employer with 50 or more employees to provide their workers with health insurance. It also requires every American who doesn’t receive health insurance through work or a government program to buy insurance themselves or face a fine. But simply providing or buying insurance is not enough to fulfill the mandate. The insurance must satisfy the government’s definition of what qualifies as proper insurance, including a long list of benefits that the government thinks you should have. In this case, the benefit we are talking about is contraceptives, and it has sparked particular outrage because it will force religious institutions to pay, even indirectly, for a benefit that they find morally repugnant. But it is hardly the only benefit that the new health-care law mandates. Among other benefits, your policy must now include mental health benefits, drug and alcohol rehabilitation, prescription drugs, dental and vision care for children and a host of other services. You may not want those benefits, and they may make your insurance more expensive, but it is no longer your choice. The government will now

decide for you. Your choice of deductibles and co-payments will also be restricted. This debate has nothing to do with access to birth control. Contraceptives are legal. There is nothing that prevents any woman who wants contraceptives from purchasing them. Most insurance plans already do so, and when they don’t, women can purchase a rider that provides the additional coverage. This is a debate about forcing all employers to pay for a benefit, rather than having such decisions based on the choices of employers and employees. It doesn’t matter whether we are talking about contraceptives, dental care or spa treatments. This should provide Republicans with an opening to discuss the arrogance of a government that presumes to know better than we do how to run our lives. Yet too many Republicans seem to see this as an opportunity to tell us how they would run our lives instead. Both sides in this debate are contemptuous of our ability to make our own decisions. Most Americans would prefer that the government simply leave us alone. They do not want the president to be our national employee benefits administrator, nor do they want him to be our preacherin-chief. Republicans need to learn the difference. This article appeared in the New York Post on February 18, 2012.

Chapter 52

Yes, the IRS Can Use Liens and Incarceration to Enforce ObamaCare’s Individual Mandate by Michael F. Cannon

Here’s a poor, unsuccessful letter I sent to the editor of the Washington Post: A recent article [“Could the health-care law work without the individual mandate?”, Mar. 28, A8] claims the IRS “will be barred from using . . . collection tools such as placing liens or threatening incarceration” to enforce compliance with the requirement that Americans obtain health insurance. Not so. Suppose the IRS assesses me a $1,000 penalty for failing to obtain health insurance. It is true that the law prohibits the IRS from using liens or incarceration to collect that $1,000. But, money being fungible, the IRS may simply deem my first $1,000 of income-tax withholding to be payment of that penalty. As a result, I would owe an additional $1,000 in income tax at the end of the year, and the IRS could come after me with every tool at its disposal, including liens and incarceration. This article appeared on May 18, 2012 on [email protected]

STOPPING OBAMACARE Chapter 53

Obamacare Can’t Be Fixed, and Now Is the Time to Dismantle It by Michael F. Cannon

At the 2011 Conservative Political Action Conference, Indiana governor Mitch Daniels observed that to turn the United States into a European-style social democracy, the Left “need only play good defense. The federal spending commitments now in place will bring about the leviathan state they have always sought. The healthcare travesty now on the books will engulf private markets and produce a single-payer system or its equivalent, and it won’t take long to happen.” We even know the drop-dead date: Jan. 1, 2014. That’s when Obamacare takes full effect, and it’s less than three years away. On that date, the feds will compel you to purchase health coverage, dictate the content of that health insurance, slap government price controls on it, and begin handing out hundreds of billions of dollars in new entitlement spending. The relatively minor provisions of the law that have taken effect to date are already killing jobs, increasing premiums and taxes, reducing take-home pay, causing private-insurance markets to collapse, and throwing Americans out of their health plans. Yet today’s cost increases and other dislocations will look like the good old days compared with what Americans will suffer when—if —they allow Obamacare to take full effect. The nonpartisan Congressional Budget Office projects, for example, that Obamacare will permanently eliminate 800,000 jobs by 2021. That’s not to mention any temporary job losses. Even more ominous: Obamacare is already creating constituencies dedicated to its preservation. For months, the Obama administration has been writing checks to states, seniors, and employers, and trumpeting the implicit subsidies that flow from the law’s price controls, all with the goal of protecting Obamacare by making more and more people dependent on it. Such efforts have so far failed to make the law popular. Polls still show that a majority or plurality of the public opposes the law, as has been the case since the first draft of Obamacare was introduced in Congress in June 2009. The latest Rasmussen poll finds that 84 percent of Republicans and 59 percent of independents favor repeal. Not even the $250 checks that the legislation is sending seniors have won them over: The latest Kaiser Family Foundation poll shows that their opposition is now higher than at any point since enactment (59 percent). That will change if Obamacare is still on the books in 2014. Tens of millions of Americans will begin to receive thousands of dollars each in government subsidies, whether through an expanded Medicaid program or Obamacare’s new health insurance “exchanges.” Medicare’s chief actuary predicts that these state-based exchanges will slowly crowd out other private coverage (such as through employers) until “essentially all” Americans get their health insurance through them. Just as important, whatever private insurance companies are still standing in 2014 will begin enrolling tens of millions of customers through the same channels. With boots on the ground and deep pockets, these two constituencies will quash any effort to eliminate their new subsidies. Public opinion may even turn in favor of the law—not because

Obamacare works, but because tens of millions of people will be dependent on it for their health insurance. What this means is that opponents may never have more power to chart Obamacare’s course than they do right now. In particular, the decisions that federal and state officials make today could determine whether the 2012 elections produce a Congress and president who are willing to repeal the law. In other words, the iron is hot. Congressional Republicans appear to grasp the weight of this moment. They are doing everything they can to ensure that Obamacare never sees the year 2014: forcing votes on repealing and de-funding the law, and undertaking a two-year campaign to expose its harmful effects. Unfortunately, their efforts are being undercut by their friends back home. Rather than beat their plowshares into swords, Obamacare opponents in most state capitols are laying the bureaucratic foundations for the law’s new entitlement spending and lending it legitimacy by accepting its debt-financed federal grants. Secretary of Health and Human Services Kathleen Sebelius boasts that 48 states have already accepted at least $1 million each from the federal government to help them plan their exchanges. It’s not just Democrats who have taken the money. Wisconsin governor Scott Walker has won plaudits for staring down government-worker unions and returning a $637,000 Obamacare grant. Yet Walker accepted a $38 million Obamacare grant to help get Wisconsin’s exchange up and running. Kansas governor Sam Brownback voted against Obamacare when he was in the U.S. Senate. Yet he has accepted a $32 million Obamacare grant and is allowing his Republican insurance commissioner, Sandy Praeger, to forge ahead with creating a Kansas exchange. Wisconsin and Kansas are two of the 26 plaintiff states in Florida v. HHS, the case in which a federal court ruled that Obamacare is unconstitutional and void. In response to that ruling, Walker’s attorney general, J. B. Van Hollen, declared the law “dead” in Wisconsin, a reality no less true in the other plaintiff states. Yet Brownback and Walker accepted their $30 million—plus Obamacare grants after the ruling. Some governors, including Idaho Republican Butch Otter, have said that the fact that they are accepting Obamacare grants and holding exchange-planning meetings does not mean they have decided to create an exchange. But taking the money lends legitimacy to a law that Otter himself is suing to overturn as unconstitutional. To date, only two governors—Florida’s Rick Scott and Alaska’s Sean Parnell, both Republicans—have refused to accept any Obamacare money or create any Obamacare bureaucracies. While Obamacare takes a beating in Congress, the federal courts, and the court of public opinion, why are so many opponents acting as its agents? Some state officials say they are hedging their bets. “Some legislators think the state version of the exchange is their only option, even if they don’t want it,” explains Twila Brase, president of the Minnesota based Citizens’ Council for Health Freedom. “They think the federal exchange is an absolute certainty and that they’ll have more power over it if it’s a statebuilt exchange.” But that rationale rests on the false premise that Obamacare can be fixed, or its damage mitigated, if it is implemented the right way. Obamacare confronts states with a veiled Hobson’s choice. The law provides that in 2014, each state will have its own health-insurance exchange where individuals who don’t have job-based coverage may purchase a federally regulated and subsidized (but “private”) health plan. States that develop and obtain federal approval of an exchange blueprint by 2013 may administer their own exchanges in 2014. In states that choose not to create an exchange, HHS will step in to create and administer one. The veil is the assurance that states will be able to tailor their exchanges. Sebelius audaciously claims

that Obamacare “is built on the belief that states understand their health-insurance markets better than anyone else. As such, it puts the states in the driver’s seat to lead the process.” Other supporters have sought to frighten Republican governors into implementing the law by holding out the nightmare scenario of the federal government’s administering the exchanges. Who administers the exchanges, however, is unimportant. What counts is who writes the rules that govern them. Those rules will be written entirely in Washington. Unfortunately, many Republican governors have taken the bait. “We cannot let the insurance exchange default to federal control,” says a spokesman for Ohio governor John Kasich, “so we are moving forward with the planning that is required to make the exchange work best for Ohio.” A spokesman for Georgia governor Nathan Deal put it more forcefully: “The state cannot halt midstream, because that would be irresponsible. It would put us too far behind if our litigation is not successful in the end.” But federal control is not just the exchanges’ default setting—it’s the only setting. In a February 24 letter to the nation’s governors, Sebelius extolled the four types of flexibility that Obamacare allows states in shaping their exchanges: 1) States can restrict insurers from participating; 2) states can add even more benefit mandates than Obamacare requires; 3) come 2017, states can opt out of Obamacare by creating a single-payer health-care system; and 4) states can adopt their own “governance structure” and “operational philosophy.” In sum, states can impose harsher regulations than Obamacare requires and can choose who sits on their exchange’s board. That’s it. The only additional latitude the Obama administration has offered came when President Obama told the National Governors Association that he is open to letting them launch single-payer systems in 2014 rather than 2017. (Vermont governor Peter Shumlin is champing at the bit.) States already had all these powers, of course, and would continue to possess them if Obamacare were repealed tomorrow. What states need, and Obamacare denies them, is the power to remove the law’s harmful regulations, which will block market competition and cost-saving innovations. Running their own exchanges won’t empower states to prevent both the most economical and the most comprehensive health plans from disappearing from their markets. Affordable plans will disappear because Obamacare requires all purchasers to buy whatever coverage Sebelius mandates as “essential,” a definition that will grow ever broader, as such definitions always do. The law’s price controls will require insurers to charge everyone of a given age the same premium, regardless of whether an actuarially fair premium might be $5,000 or $50,000. Even state-run exchanges would see comprehensive health plans crumble under the weight of too many patients who cost $50,000 but pay far less. Nor can state-run exchanges prevent other dimensions of quality from eroding. Even in state-run exchanges, the sickest patients would struggle to get their claims paid by insurers who are trying to avoid, mistreat, and dump them, because that is what Obamacare’s price controls reward. States that run their own exchanges will likewise be powerless to prevent HHS from loading healthsavings-account (HSA) plans down with mandated benefits. They will have no power to save HSAs from Obamacare’s “medical-loss ratio” and “minimum actuarial value” requirements, both of which threaten to destroy health savings accounts. Twenty-one Republican governors recently told Sebelius that she should prepare to administer their states’ exchanges unless HHS 1) provides them “complete flexibility” in running their exchanges; 2) waives all of Obamacare’s benefit mandates; 3) waives the provisions that threaten HSAs; and 4) gives states “blanket discretion” to move non-disabled Medicaid enrollees into the exchanges. There is zero chance that Sebelius will accede, because she cannot. Granting the first three demands would mean

repealing most of Obamacare’s central requirements: the price controls on health insurance, the individual mandate, and the medical-loss-ratio requirements, for starters. That would require an act of Congress. Obamacare vests vast discretionary power in the HHS secretary, but not this much. And even that act of Congress would not fix Obamacare. The new entitlement spending, in Medicaid and the exchanges, would begin flowing in 2014 as scheduled. The law would still impose an enormous unfunded Medicaid mandate on states. My colleague Jagadeesh Gokhale estimates that new York State would get hit the hardest, being forced to shell out an additional $66 billion over the first ten years. Indeed, the “blanket discretion” these governors seek to move Medicaid enrollees into the exchanges, aside from being a fairly shameless ploy to shift the cost of their Medicaid programs to taxpayers in other states, would entrench Obamacare by making millions of current Medicaid enrollees dependent on the exchange subsidies. Sebelius’s official response to the governors was, effectively, “drop dead.” Having received this answer, the 21 governors should stick to their guns and join Scott and Parnell by refusing any additional Obamacare funds, returning the funds they have heretofore received, and declaring that they will not create any Obamacare exchanges. Brase argues that such a move might doom the exchanges because HHS likely cannot create that many without the help of state officials. “The future is uncertain about a federal exchange,” she explains. “Why should we do the feds’ work when they might never achieve the exchange without our help?” There is simply no rationale for implementing an exchange that stands up to scrutiny. Some governors have indulged the fantasy that they can create a better exchange, one that does not comply with Obamacare. It’s an audacious stratagem. But ask yourself: What insurance company will participate in an exchange that flouts federal law? Before you answer, remember that the federal government is some insurance companies’ largest customer. And remember that every new bureaucracy is itself a constituency for more government. It would be better that states not create exchanges at all. “Anytime you can keep a government from setting up any bureaucracy of any sort,” writes Charlie Arlinghaus of New Hampshire’s free-market Josiah Bartlett Center for Public Policy, “it is a victory.” There is no good way, or even a less-bad way, for states or the feds to implement Obamacare’s exchanges or other central elements. Permitted to stand, Obamacare will reduce Americans’ incomes, harm their health, and decrease their freedom. The only way to fix it is to demolish it. “Collaboration in setting up exchanges only encourages the corporate interests who will profit from them and sends a signal that ‘repeal and replace’ is not serious,” writes the Pacific Research Institute’s John R. Graham. Rather than spend any time, money, or energy creating constituencies for Obamacare, Graham writes, “we have to discourage implementation, totally and immediately.” In The Bridge on the River Kwai, the British POW Colonel Nicholson recognizes that his collaboration with his Japanese captors was madness, and gives his life to undo it. State lawmakers need to have a similar epiphany about Obamacare, before things reach the point where correcting their mistakes will cost them their political lives. Unlike soldiers, politicians aren’t into self-sacrifice. This article appeared in the March 21, 2011 issue of National Review.

Chapter 54

Should New Hampshire Create a Health Insurance Exchange? by Michael F. Cannon

Committee on Commerce and Consumer Affairs New Hampshire House of Representatives Good morning, Chairman Hunt and members of the committee. I am very pleased to be with you today. My name is Michael F. Cannon. I am the director of health policy studies at the Cato Institute, a non-partisan, non-profit educational foundation in Washington, D.C.. The mission of the Cato Institute is to promote the principles of individual liberty, limited government, free markets, and peace. Background The most important health policy issue facing New Hampshire is the fate of the health care law that President Barack Obama signed in March of 2010, whose official title is the “Patient Protection and Affordable Care Act.” That law is already increasing the cost of health insurance by as much as 30 percent in some cases, and will cause even greater premium increases in the years to come. When that law takes full effect in 2014, it will set in motion several important changes. Though states are already struggling to pay for their current Medicaid programs, beginning in 2014, this law will add to those burdens with enormous unfunded mandates. The law imposes government price controls on health insurance that will dramatically increase premiums for healthy purchasers. The law’s so-called “individual mandate” will increase premiums further and compel nearly all Americans to purchase a nominally private but government-designed health insurance policy. Those who fail to comply will face penalties including fines and/or imprisonment. Neutral observers and even supporters of the law estimate that due to the law’s government price controls and individual mandate alone, premiums for some Americans would more than double. A study performed by Milliman Inc. for the state of Ohio, projects: “In the individual market, a healthy young male (with benefit coverage at the market average actuarial value pre- and post-[PPACA]) may experience a rate increase of between 90 percent and 130 percent . . . In the ESI-small group market, rating changes may result in a premium increase of 150 percent . . . “ A study of the law’s impact on Wisconsin by MIT economist Jonathan Gruber, a leading defender of the law, projects that premiums for some individuals will rise by 139 percent or more. Finally, the law envisions health insurance “Exchanges” that would become operational in 2014. These new government bureaucracies would enforce these costly new regulations and distribute hundreds of billions of taxpayer dollars to private health insurance companies, thereby driving up the national debt. The law allows but does not require states to create an Exchange. To be clear: contrary to what some state officials have claimed, New Hampshire is under no obligation to create a health insurance Exchange. The authors of the health care law knew that such a requirement would be unconstitutional. Instead, the law asks states to do the heavy lifting of creating these bureaucracies, and as a fallback allows the federal government to create an Exchange if a state declines to

do so. The Health Care Law’s Future Is in Doubt Supporters introduced the first draft of President Obama’s health care law in Congress in June 2009, and a bipartisan majority or plurality of the American people have consistently opposed it ever since. A mere 37 percent of the public supports the law. Opposition is highest among likely voters. More than 80 percent of Americans oppose the law’s individual mandate; Officials representing 28 states and both political parties have filed suit to overturn the entire law. Multiple federal courts have struck down all or part of the law as unconstitutional. The U.S. Supreme Court will hear oral arguments on the constitutional challenges to the individual mandate and Medicaid mandate in March 2012. Legal experts predict the Court will rule on these challenges the following summer. One of the two major political parties has committed itself to wholesale repeal. Should New Hampshire Create a Health Insurance Exchange? Against this backdrop, the most immediate question facing state officials is whether to create a health insurance Exchange. In the remainder of my remarks, I will explain why, whether one opposes or supports this law, the responsible course is not to create an Exchange. The question of whether or not to create an Exchange is simplest for state officials who have taken the position that the federal health care law is unconstitutional. New Hampshire officials, like state officials nationwide, take an oath to protect not just their own state’s Constitution, but also the U.S. Constitution. They are therefore oath-bound to use all lawful means to block laws that they believe violate the U.S. Constitution. The same duty that obliges officials to sue to overturn the health care law also obliges them not to implement it. To implement this health care law, to create an Exchange, is to violate their oath of office. Whether you support or oppose the law, there are several reasons for New Hampshire legislators not to create an Exchange. First, you don’t have the time. There is not just one Exchange; there are two of them. If you opt to create an Exchange, then among your many responsibilities will be such diverse tasks as the following. You would be responsible for ensuring that carriers do not follow the law’s enormous financial incentives to avoid, mistreat, and dump the sick. You would have to run a reinsurance program and a riskadjustment program. You would have to define and monitor “network adequacy” as well as each insurance carrier’s service area. You would have to monitor each carrier’s marketing materials. You would have to monitor and enforce carriers’ compliance with the law’s other anti-discrimination provisions. You would have to fund and monitor the “navigators” the law envisions. You would have to fund the Exchange in 2015 and beyond, perhaps with a premium tax. (Oregon has opted for a premium tax of up to 5 percent.) Then there’s all the reporting you would have to do to Washington, the approvals you would have to obtain, and the months and months of waiting for an answer on everything. Unless New Hampshire’s economy and unemployment situation are somehow bucking the national trend, New Hampshire’s elected officials have more pressing matters to attend. If you do somehow find that you are not busy enough, at the end of my testimony I suggest some real health care reforms you might advance. Second, you don’t have the money. That’s because there is no money. Unless New Hampshire’s state budget is likewise bucking the national trend, neither New Hampshire nor the federal government has money to spend on new government bureaucracies. Every dollar that New Hampshire spends on an

Exchange is a dollar it cannot spend on roads, education, or police—or more important, a missed opportunity to spur economic recovery by reducing the tax burden. Any federal grants that New Hampshire has already received, and any additional federal funds it may receive, are adding to the nation’s debt burden and bringing the United States closer to a Greek-style debt crisis. The fiscally responsible option, which many states have exercised, is to send that money back to Washington and to refuse any additional funds. Third, it makes little sense to create a new government bureaucracy today to implement a law that may be repealed or overturned tomorrow. Fourth, creating an Exchange will leave New Hampshire officials to take the blame when this law begins hurting the state’s sickest patients. When the Exchanges open for business, they will be inundated with high-cost patients. The government price controls that the law imposes on health insurance premiums will create massive incentives for insurers to avoid, dump, and mistreat the sick— as carriers have done in every market where governments have imposed these price controls. The law creates several programs whose sole purpose is to protect sick people from the perverse incentives inherent in these price controls. I mention many of these programs above: programs that tax some health plans in order to subsidize others, “network adequacy” rules, requirements that carriers serve a large enough “service area,” restrictions on marketing, and other anti-discrimination provisions. States that create their own Exchanges will be responsible for running these programs and protecting the perverse and harmful incentives the law creates. Let’s be clear about what is happening here: the federal government wants you to stop insurers from mistreating the sick, even while the federal government is offering insurers huge financial incentives to do just that. In other words, the federal government is setting you up to take the fall. The programs intended to prevent such misbehavior will inevitably fail, and many of New Hampshire’s sickest patients will be hurt and angry. Those patients will not blame the well-meaning price controls that create those perverse incentives.